Anglo American said recently it would scrap its dividend this year and next, hugely reduce capex and look to sell all its lossmaking assets. The move — deemed unsurprising by some and insufficient to a few — is a testimony to the primary issue facing the ferrous mining and metals market: China’s slowdown.
China was ostensibly the sole driver of the commodities boom, and its drastic downsizing is the pain point for steelmakers, iron ore and coal miners worldwide. Anyone selling to the dragon is getting burned. Badly. Even mining titan Vale has had its credit rating downgraded to one notch above junk.
Clearly this is not just in reaction to China’s cooling. Other events such as the Samarco dam collapse disaster also play a role — but a primary buyer running into trouble is a huge issue.
News of Anglo’s restructuring arrived just a smidgeon earlier than the yuan hitting a four-year low against the greenback in the first week of December, as investors fretted about the extent of capital outflows and weakening imports and exports.
China’s foreign reserves depleted by $87 billion in November, near the record high of $94 billion, with Morgan Stanley estimating around $55 billion was accounted for by outflows. This took China’s foreign reserves to around a monumental, but massively reduced, $3.4 trillion.
This suggests Beijing is spending mammoth amounts to prop up the yuan, and that investors are more than a little concerned by China’s more sluggish growth, to put it mildly.
China is the big proverbial patient zero of the ferrous metals market, so whatever infection it catches is transmitted to the rest of the world. The chart below shows how European hot-rolled coil prices have tracked FOB China levels lower.
This price erosion is being mirrored across the globe. And FOB China is increasingly important for the ferrous chain, as is often the case in maturing commodities markets — global benchmarks (such as dated Brent or WTI, or arguably CFR China 62% iron ore) become focal points for trade and are widely adopted in industry pricing.
Sluggish steel demand and environmental concerns mean further mill production cuts are inevitable; Beijing and the China Iron and Steel Association (CISA) have to do something to stem the us-versus- them vibe developing in the rest of the global steel market, with China’s exports already surpassing 100 million mt.
Such reductions will not be an overnight fix by any stretch, and represent something of a double-edged sword — while lower output might lift low steel prices, it will bite into raw material demand and pricing. And the cheaper yuan will likely continue to buoy China’s export competitiveness, something the rest of the world will definitely not be crazy about.
From boom to bust
So steelmakers globally are aiming to slash the tire of the wheel that’s China, the former darling of the supercycle. And the debate over its market economy status is yet another controversial area of the battleground.
When China joined the World Trade Organization in 2001, some members expressed worries about how trade remedy laws would apply.
“The continuing role of the Chinese government in the economy in general, and its control over prices of key inputs to many manufactured products in particular, meant that Members investigating possible dumping of Chinese products could not rely upon prices or costs in China as the basis for determining whether dumping had occurred,” Washington, US-based law firm Wiley Rein said in white paper released Sept. 15, 2015.
To alleviate these concerns, China agreed to provisions allowing countries to base dumping comparisons on external prices and costs. This was detailed in Section 15 of China’s Protocol of Accession to the WTO, according to Wiley Rein. However, this provision will expire on Dec. 11, 2016, fueling a debate in Europe and the US as to what implications it could have for the industry should China be treated as a bona fide market economy.
Should typical WTO protocols apply, dumping margins would have to be calculated comparing export prices with China’s domestic pricing — and herein lies the root of the issue, according to those in the European and US industries.
“Because of excess capacity and subsidies, the Chinese domestic price is artificially depressed, down to levels which go below even export prices [in the case of steel] meaning that no further dumping margin will be found,” with the dumping margin being equal to the positive difference between domestic price and export price, Axel Eggert, director general of Eurofer, told Platts.
Eggert said “potentially the whole steel sector in Europe is under threat because of the sheer size of Chinese [excess] capacity, which alone represents 50% of global steel capacity.”
“If China perceives EU anti-dumping instruments as measures that will be neutralized upon their receiving market economy status, this [anti-dumping] remedy against unfair trade practices would lose its deterrence capability,” Eggert added.
Gareth Stace, director of UK Steel, said the association’s position was that the European Commission should not grant China market economy status.
“The EU and other members of the WTO — including the United States — are currently considering whether to grant market economy status to China, with some EU officials reportedly leaning in favor of a unilateral grant of MES,” Washington-based Economic Policy Institute said. The UK, facing the near-demise of its own steelmaking industry, is reportedly in support of China’s market economy status.
In a report prepared for European businesses, the Economic Policy Institute said the unilateral granting of market economy status to China would put around 1.7 million-3.5 million European jobs at risk by curbing the ability to impose tariffs on dumped products — as many as 350,000 jobs could be eliminated in Europe’s steel sector alone, out of 779,300-1.5 million in the wider manufacturing sector, it said.
“I cannot assess the likelihood of China gaining market economy status, that’s not for me to say,” Dr Peter Morici, an economist and professor at the R.H.Smith School of Business, University of Maryland, told Platts. However, he said the granting of MES would “make life more difficult for others in the steel industry.”
Think!Desk China Research & Consulting said, “Chinese government bodies at all levels are exerting substantial direct and indirect influence on the resource allocation in the Chinese economy as well as concrete decision making processes in Chinese enterprises.” It suggested the Chinese economy meets only one out of five for MES under WTO guidelines.
“The dumping route doesn’t work and the countervailing duty approach is tough because of hidden subsidies — things like cheap bank loans, or steel mills there getting resources that are subsidized, such as a lot of energy and petroleum-based products. These things are extremely difficult to track,” Morici added.
“Given the circumstances, I think our government needs to fight the fight. Steel [and other producers] have a valid case and valid concerns, and I believe they are correct in their analysis of the situation,” Morici said, adding, “China could end up dumping its unemployment on us.”
Think!Desk said 33 anti-dumping investigations were opened against China in the first half of 2014, and 75 in 2013.
“The use of true market determined pricing for determining whether there is dumping from non-market economies is the only way to calculate the true margin of dumping and to prevent the distortions in the Chinese system from contaminating market based price setting,” it added.