China's not a long-term threat

Steel exports are being discouraged by China's Central Government. Chinese steelmaking costs are not low.

The Chinese steel industry is not a threat to the global steel industry because it will never become a sizable net exporter of steel products. Consider this:

In the Chinese command economy, government policymakers are accustomed to meddling with developments in the steel industry. Most of the top executives in the steel industry are still chosen by the government.

Government policymakers will almost always keep the economy growing at a pace at which it is on the verge of a sizable rise in inflation. (Note: High inflation is intolerable because it would wipe out the savings of Chinese citizens, which are the backbone of the country’s amazing economic growth.)

The steel industry is always a potential engine of inflation in China given its vastness. It accounts for about 4% of GDP on a value-added basis. It uses up and depends on China’s resources – iron ore, coking coal, water, electricity, ports, railroads, roads and water – to an amazing extent. It is a creator of air and water pollution – which is hated in China far more than in the Developed World because it is such a problem in China. The steel industry has done an amazing job in providing the steel for the country’s amazing growth – a circumstance that must be sustained.

Steel price increases are just as frightening to government policymakers in China as they are to steel buyers. (Note: In fact, WSD suspects strongly that the Chinese government is in the process of telling the country’s sheet producers that further price boosts cannot be tolerated after the recent sizable rise after the ending of the Lunar New Year in mid-February.)

Sizable exports by the Chinese industry on an internal basis boost the inflation risk because it places pressure on the country’s infrastructure and, also, makes the country even more dependent on imported raw materials. On an external basis, sizable exports, except when steel export prices are elevated, run into the risk of highly undesirable anti-dumping and countervailing duty (anti-subsidy) suits by the Chinese steel industry’s offshore competitors.

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