2024-08-19 08:01:30
What do a steel mill in Shanghai that sees its sales shrink by 70% and a worker in Chile who loses his job after nearly five decades have in common? The pain of China, which is becoming a global pain.
China remains the king of steel, producing more than 1 billion tons per year, more than 50% of global production. But now it is wavering. And just as it rocked global industry in its rise to become the metal’s super-producer, so in its fall it can only spark turmoil.
As Bloomberg explains in its analysis, the slowdown in China’s construction sector means there is too much steel and too little demand. For the rest of the world, the fear is that it will become a dumping ground for excess product, This leads to a drop in prices, shuts down factories and puts workers out of work.
It is yet another strong challenge facing the world right now, especially in Europe where Germany is barely going to grow this year. The US has increased safeguards for the industry, but any new threat could become a high-profile political issue ahead of the presidential election, given the importance of steel to so-called swing states. number of electors), such as Pennsylvania.
China’s changing economic model
President Xi Jinping’s drive to change China’s economic model, reducing growth’s reliance on the construction sector and property market, is having profound implications for the steel industry. Xi’s goal is to lead the world’s second-largest economy on paths fueled by high technology and green technologies in the coming decades. The bubble in the real estate market has also burst and the crisis has brought an end to a long era of rapidly growing demand for the metal.
But there are big questions about how the Chinese leadership can manage its contraction while protecting the economy and jobs.
“Margins are shrinking along with falling prices. I can hardly make money this year,” Yu, whose Shanghai business sells piles of steel sheets for buildings, tells Bloomberg. “Chinese demand is extremely weak,” he adds.
The danger signals
It was Hu Wangming who warned of the extent of the problem. As boss of China Baowu Steel Group Corp., he oversees an all-powerful empire of blast furnaces — huge furnaces used to melt industrial metals that have underpinned global industrialization for two centuries. It produces 130 million tonnes of steel each year – more than the US, Germany and France combined. So when Hu said the steel industry was facing a “harsh winter,” his words carried weight, both inside China and around the world.
Shanxi Jianbang Group also issued a distress signal. The steel industry needs to close more than 30% of businesses to escape the current maelstrom, General Manager Zhang Rui said on August 15.
“China’s steel demand has already peaked, and then we will see a steady decline,” Wu Wenzhang, founder of consultancy Shanghai SteelHome E-Commerce Co., told Bloomberg. which has been active in the industry for 40 years. “It will be very difficult for steel to break out of this vicious cycle in the next two to three years unless there is a strong push by the government for mergers and restructuring among steel companies,” he explained.
In addition to the real estate slump, infrastructure spending has begun to decline and factories are struggling with steadily falling prices. Still, China’s economy is on track to meet a growth target of around 5 percent, despite the fact that Xi has avoided the kind of massive stimulus seen in past crises.
Lower prices are of course a boon for steel-using businesses, but the impact on producers is proving severe, with profits under pressure and factories closing.
Lockouts and mass layoffs in Chilean factories
Chile’s government this year rushed to impose new tariffs on imports from China to prevent the closure of plants by CAP SA, the Latin American country’s top steel and iron ore producer. The company initially froze its decision to lock down factories, but after another quarter of heavy losses, the shutdown was inevitable.
72-year-old Hector Medina, the company’s employee representative, is negotiating severance packages for 2,500 workers (including his own). It is a huge blow to the local economy, where more than 20,000 people rely on CAP SA’s business. Even the local football team and stadium are named after them.
“The shutdown is the result of absolutely unfair competition from China,” Medina told Bloomberg. “We will all lose our sources of income.”
Strong impact in Europe too…
In Europe, where steel demand was already anemic, Germany’s Salzgitter AG cited overcapacity and Chinese exports when it announced its financial results, which showed a loss in the first half. The economy ministry told Bloomberg it was monitoring the situation and noted “tough international competition.” ArcelorMittal SA, Europe’s top steelmaker, has been similarly critical of the impact from China.
“The warning from China suggests that our fears are now being realised,” said Martin Teringer, chief executive of the German Steel Association. “It’s about resilience. Overcapacity is jeopardizing the profitability and viability of the industry here.”
…who fears a political storm
The latest steel crisis in 2015 and 2016 caused a political storm in Europe and the US. Donald Trump focused much of his 2016 election campaign on steel, promising to defend the US from cheap Chinese imports, while lawmakers across Europe were trying to protect their domestic industries.
Much of the current trade tensions between the US, Europe and China focus on 21st century technologies, but steel retains the ability to ignite emotions, particularly when it comes to historic businesses and the local communities built around them in areas like the US Belt and Road rust, the Rhine Valley or northern England. Given the defense sector’s need for steel, it is also considered a sector directly linked to national security.