Smudged view of ‘substandard steel’

A Bloomberg news item from early December 2016 brings what, at first glance, appears to be encouraging news for overseas steel producers in the form of an initiative in a Chinese region to shut down “illegal” steel mills. Any attempt to rein in Chinese overcapacity, after all, could be seen as a positive in the market.

However, a closer reading of the report reveals some head-scratching phrasing used to describe the initiative and some potential impacts that may yet do more harm than good.

Citing China-based analysts and consultants, Bloomberg reporters say government officials in two provinces and one city in China have declared they will cut off power and water supplies if necessary to shut down electric induction furnace steelmakers, which use scrap as feedstock, in those regions.

One analyst calls the mills producers of “low-quality construction steel,” thus likely rebar, which is typically made from scrap in electric furnaces and does not need to meet the same purity levels as sheet steel or structural steel. The Bloomberg writers refer to it as “substandard steel.”

Some of the steelmakers who are being targeted may indeed be questionable operators. However, many also can be labeled as entrepreneurs—people who see China’s growing scrap reservoir as a reason to move China’s electric arc furnace (EAF) production share beyond its current 6 percent level in that nation.

A skeptic can see these crackdowns as more favoritism toward and protection of China’s large state-owned enterprises (SOEs). These large, integrated, basic oxygen furnace- (BOF-) operating steel companies are sizable employers for the steel and coal sectors in northern China. Their protected status, in the eyes of critics, make a mockery of China’s attempt to be recognized with market economy status by World Trade Organization member nations.

Ferrous scrap recyclers in North America have more than one reason to watch developments such as this one carefully. If China continues to protect its BOF-operating SOEs, those firms likely will continue to churn out steel at a pace only possible with protection and subsidies. This puts a ceiling on domestic steel production and suppresses steel prices globally. Beyond that, if China’s steel producers are not encouraged or even allowed to switch to EAF production, the country will soon be a net exporter of ferrous scrap.

Adding to the intrigue is the election of a U.S. president who is appointing people with steel industry experience to key positions, including Wilbur Ross as the nominated secretary of commerce and possibly Dan DiMicco in a trade role. Such appointees are unlikely to see activities in China’s steel sector as being indicative of a “market economy” nation.