As the world prepares for the upcoming Sino-US Strategic and Economic Dialogue in Beijing on May 24-25, China is attempting to move the world’s attention from the real center stage event – currency pegging and increasing trade imbalances – to a tiny town in Mississippi by announcing a $175 million investment by China’s Anshan Steel in upstart Steel Development Corp today. We believe this announcement is yet another ploy by Beijing to obscure the meaningful issues on trade imbalances facing the two nations ahead of talks with the United States.
In our view, this investment is a spit in the ocean relative to steel industry trade imbalances. To put this into perspective, the oil pipe trade case – won 5 months ago – was for a record $3 billion, and in the 5 months since the settlement of the case, the domestic pipe manufacturers involved in the case have announced in excess of $1 billion of new investment in the sector.
So politics is bringing this country a whopping $175 million, while enforcement is bringing to America over $1 billion in a single steel product line; the math on this imbalance is quite straightforward.
In what is a far more visible event than reality would support, Anshan Steel has announced plans to invest $175m in a US-based upstart, Steel Development Corp, a bar mill based in Mississippi.
Press accounts are focusing on the politics and the timing and we agree that this is as politically driven an investment as possibly could be. Without taking away anything from the merits of the team in Mississippi – trying to get a startup financed in the current environment is daunting – we believe that this tiny spit-in-the-ocean investment is timed to coincide with the upcoming visit of US officials to Beijing to talk about the latest strategy for dealing with global trade imbalances, as well as at a time when Chinese steel exports are once again ramping up. April Chinese steel exports nearly tripled from the year ago level, while exports from China for the first four months of the year doubled against 2009.
In particular, the WSJ’s “China Blog” is reaching into history, and accurately pointing to a spate of investment by the Japanese steel industry, which reluctantly followed their automotive customers to the US in the mid-to-late 1980s as Toyota (TM)/Honda (HMC)/Mazda (MZDAF.PK) and demanded higher quality steel than was available at that time in the US market. And, once the artificial pegging of the yen to the dollar around 250Y was dropped in 1985, the “new domestics” found meaningful economies in buying local supplies and the Japanese steelmakers made significant investments in domestic steel; at one point there were at least a dozen large joint ventures in the US.
The results of these joint ventures were less than good for the Japanese steelmakers and most of these investments – with some notably successful exceptions – were unwound in the 1990s. Today the American mills service the Japanese automakers well with high quality steel.
We do not see the Chinese investing in the US as a comparable path in the least as there are no Chinese manufacturers in the US with an established market anywhere comparable to the likes of Toyota, Honda and Mazda in the 1980s. We believe in fact that the opposite strategy makes more economic sense, for the Western steel companies to invest in China in order to fill their automotive facilities with the high quality steel that they demand.