Bad tempered steel

| August 31, 2021

A recent report in China’s Global Times newspaper suggests Chinese steel mills are imposing discriminatory cuts to exports to Australia as a new element in the continuing campaign of economic coercion against the government.

‘China’s shrinking steel supply, against the backdrop of deteriorating bilateral relations, will likely lead to a steel shortage for the recovering Australian economy,’ the report said.

The report cited Chinese analysts saying that although China’s overall steel exports had halved in recent months, shipments to Australia had dropped by much more than that.

If that’s happening, the Australian Steel Association, which represents the major steel trading businesses operating in Australia, hasn’t heard about it. Certainly, supplies from China are down, as they are from other suppliers as well, but global trading businesses aren’t seeing steeper cuts in Chinese shipments to Australia than to other markets China serves. For example, one of the association’s members has seen similar cuts in sales to Africa.

‘We don’t believe it is targeted at Australia in any way,’ says ASA chief executive David Buchanan, adding that cuts to China’s exports seem mainly to be about reducing steel production in the interests of environmental objectives.

The Global Times article was not well sourced, with comments coming from two steel exporters who said they don’t have significant trade with Australia rather than from any official quarter. However, the nationalist paper is often used to ‘front run’ issues on which the Chinese authorities don’t want to comment openly.

When Australian coal shipments started being turned away from Chinese ports in mid-2020, it was initially thought to be a pollution-control measure applying to all of China’s coal imports, and Chinese officials denied there was an issue specific to Australia. It wasn’t until last September and October that it became obvious that there was a complete ban on Australian coal imports.

So it’s possible that a discriminatory squeeze on steel supplies to Australia may yet emerge. If it does, it will be the first time China has used the withholding of its own exports as a coercive tool since 2010, when shipments of rare earths to Japan were stopped in the midst of a dispute over the arrest of a Chinese fishing crew in waters claimed by Japan.

Even if the report is an empty threat—and the Global Times enjoys taunting Australia—it exposes a vulnerability.

It comes as steel is in short supply globally for the first time in decades. It has long been the case that world steel markets were oversupplied, principally because of excess capacity in China. Australia has been at the forefront of nations applying anti-dumping duties to Chinese steel and related products to keep Chinese steel out and protect local industry.

But demand for steel has soared during the Covid-19 pandemic as governments and central banks sought to stimulate housing construction and infrastructure works and house-bound consumers stocked up on new household goods rather than spending on travel.

Efforts by governments around the world, including China, to curb greenhouse gas emissions have resulted in shutdowns of steel-making capacity.

Shortages in steel supplies from the mills are made worse by the lack of shipping capacity to respond to the rising demand for goods generally.

As a relatively small market that’s not on a sea route to anywhere, Australia has always been a difficult market to service for global-scale steel suppliers. At a time of global shortage, Australia is low in the pecking order for available supplies from all major steel-producing countries.

It is a shift in the global balance of supply and demand that exposes the vulnerability of Australia to exactly the sort of threats contained in the Global Times article.

Although Australia retains domestic steelmaking with Bluescope in Wollongong and Liberty Steel in Whyalla, which are both working flat out, its dependence on imports has grown. Australia lost its capacity to produce stainless steel in the 1990s, and Bluescope shut its rolling mill in Hastings about 10 years ago.

Australia has similarly lost its capacity to produce rolled aluminium following Alcoa’s closure of its Australian rolling mills, with Chinese suppliers filling most of the gap.

China has a smaller share of Australia’s basic steel imports than the 30% claimed in the Global Times article, with United Nations trade data showing its share in 2019 was 24%. China provides a larger share of fabricated steel products—for example, it provides about 70% of Australia’s imports of steel sections for use in structures and 53% of imports of steel tanks and drums, although these come from fabricators rather than from the steel mills directly.

The ASA’s Buchanan says steel trading businesses servicing the Australian market have been wary of Chinese supplies partly because of their vulnerability to anti-dumping action, which puts prices out of reach, and also because of China’s own efforts to restrict exports.

China has ordered that steel production this year not exceed the 1.064 billion tonnes produced in 2020 in order to curb greenhouse emissions and is placing curbs on exports to ensure its domestic market is serviced first.

Chinese authorities have cancelled rebates of value-added tax on steel exports and are rumoured to be planning to impose export duties in an effort to force a reduction in steel production. Chinese mills pass these costs directly on to users, leading trading companies to seek alternative suppliers.

The shortages have resulted in huge price increases of between 60% and 100% for basic steel products. Australian customers who held off making orders expecting prices to fall are now scrambling to fill them.

The Australian government has been alert to the danger of essential industrial supplies being disrupted, commissioning a Productivity Commission study into the risks and establishing a new Office of Supply Chain Resilience in the Department of the Prime Minister and Cabinet.

The recently completed Productivity Commission study concluded that there were relatively few imported goods for which Australia was largely dependent on a single supplier without obvious alternative suppliers. It estimated that only one in 20 of the almost 6,000 different products Australia imports was vulnerable to disruption. It also said that many of them were not essential items, citing Christmas decorations as an example.

However, the Productivity Commission used high thresholds to determine vulnerability, counting only goods where 80% came from a single nation that also controlled more than half of global trade in those goods. Curbs to Chinese supplies with market shares much lower than that could cause economic disruption in some Australian industries.

Of the 292 goods that fell within that definition, two-thirds came from China, including a number of essential goods such as chemicals, pharmaceuticals and metals. China also accounts for a large share of fertiliser supplies.

As ASPI’s recent report on Australia’s trade vulnerability in any future conflict over Taiwan demonstrated, disruption to the flow of imports is likely to be more damaging to the economy than blockages to exports.

This article was published by The Strategist.

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