According press reports, Canada has joined the US, the EU, and Mexico in the WTO complaint against China’s export restraints on nearly 2 dozen raw materials – many that go into steelmaking. The economic issue is that this “resource hoarding” results in artificially lowered cost for these raw materials and in effect becomes a subsidy for higher cost manufacturing operations that China deems “strategic.”
The impact of China’s steel industry subsidization is a key issue driving the health of the Western steelmakers and a key driver of equity values today. With Chinese steel totaling some 50% of global capacity and among the highest cost in the world, the recent surge we’ve seen in exports from China means that the region is pouring its high-cost steel into a world that can barely seek equilibrium in this “new normal” global economy. Last month the West ran at about a 70% operating rate, while China ran full-out.
In our view, the direction of the global steel industry – and equities – hinges almost in its entirety on the direction of China’s high cost excess capacity. We think this process – as well as the heightened profile of a key issue facing Western manufacturers who compete with China – is a healthy one for the sector and hope to see a swift resolution.
Canada has now joined the US, European Union and Mexico in asking the WTO to set up a dispute settlement panel regarding China’s export restraints of raw materials including coke, zinc, bauxite, fluorspar, magnesium, manganese, silicon metal, silicon carbide and yellow phosphorus after failing to resolve the dispute following consultations with China.
The US and EU filed requests for consultations with China in late June while Mexico filed in late August in an effort to get China to remove quotas and export duties on these products which artificially reduce the cost of raw materials in China and increase global prices of these products. The countries say that the export restraints are inconsistent with WTO guidelines and give China’s steel, aluminum, chemical, semiconductor and aerospace industries an unfair advantage. The WTO will make a decision regarding the establishment of a panel on November 19.
In our view, a positive ruling – although it may take more than a year to resolve from the inception - would be especially beneficial to domestic integrated steelmakers as China is the largest global producer of coke – which has an export tax of 40% and quota of 12M tonnes - and a removal of these export restraints could significantly lower the price of coke available to these companies.