Commerce Places Final Duties on Chinese Steel. The Commerce Department (DOC) placed final duties in the $119 million antidumping (AD) and countervailing (CVD) case against Chinese drill pipe on Tuesday. The AD duties of 69% on five companies with a country-wide rate of 430% were put in place to balance out the impact of Chinese dumping – meaning selling high-cost steel at cut-rate prices outside their home country. Many of these duties may also end up being retroactive when the International Trade Commission issues their final ruling next month.
Current Administration Taking Longer-Term View to Rebuild Economy. This decision supporting domestic manufacturers is just the latest development in a string of government findings supporting the view that the Chinese steel industry has often engaged in predatory trade practices that amount to mercantilism, or economic nationalism. Import dumping like this may benefit the consumers in the targeted nation by providing material at lower prices in the short run. However, in the long run, if dumping is allowed to persist, it typically drives out domestic capacity that may actually be more efficient and/or low cost. In the long run, capital is misallocated to the dumping countries and away from the lower-cost target markets, resulting in a net higher cost structure to consumers.
Chinese Rare Earth Monopoly a Full-Circle Object Lesson. The best example of the damage dumping can bring in a commodity market is what’s happening today in the rare earth business. In the 1980s and 1990s, the domestic rare earth business was squeezed out of existence by a combination of dumping by China and stranglehold by the US EPA. Twenty years later, China has a 95% share monopoly position in these minerals that are key not only to technology manufacture but to expansion of the green manufacturing agenda. Only when the Chinese used their rare earth trade as a political threat in 2010 did the West recognize the risk of not fighting back in a trade war that was declared on the US decades ago.
US Just One Voice in the Chorus. In our view, steel is the “canary in the coal mine” and there has been an increasingly loud “ouch” in the global steel community about the impact of China’s mercantilist steel policies over the past few years. China’s steel trading partners have been addressing China’s exports in three separate ways. First, the EU, US, Mexico and Canada remain in the midst of a complaint at the WTO level filed in December 2009 – unprecedented – about China’s “resource hoarding” – controlling exports of steelmaking raw materials – which effectively subsidizes Chinese steelmakers and keeps key steelmaking raw materials off the open market raising the cost to non-Chinese players. Second, many of China’s trading partners have used their own trade laws – consistent with WTO – to target high-cost Chinese steel. Finally, the West has implored the Chinese authorities to take aggressive measures at enforcing their own policies – designed to upgrade Chinese steelmaking overall by cutting production at the country’s regional high-cost players and consolidating these with their lower cost peers.
Outlook. We believe that the US is increasingly becoming more and more in touch with the economic consequences of a free market economy interacting with a mercantilist China, and the ripple effect is bullish for steel. A meaningful victory for the sector was the original $2.7-billion oil country tubular goods case – a similar product and market. Since that tariff decision was announced in December 2009, there’s been an estimated $2 billion of new capital spending in that sector announced for the United States. This kind of tangible confidence-restoration is needed to be replicated on a macro scale throughout the economy in order to reignite broad-based economic growth.
Disclosure: Author long R, CLF, NUE