VERCAPACITY ANDits underlying causes– primarily govern-ment intervention andmarket-distortingpractices – have longplagued the global

steel industry. For decades, governmentshave created and maintained substantialsteel capacity in their countries, often farin excess of demand. The result has beenpersistent global steel overcapacity, andsignificant adverse effects stemmingfrom this supply-demand imbalance.

Despite clear lessons from prior peri-ods of overcapacity, including the 1997-2001 U.S. steel import crisis, many in theglobal steel industry have failed toaddress the underlying problems, result-ing in massive overcapacity – estimated atmore than 500 million metric tons world-wide and growing. This huge capacitygrowth has not been driven by marketforces, but rather by increasing govern-ment ownership and intervention in theglobal steel industry.

History Repeated For decades, global steel producers havesuffered from overcapacity in the indus-try, largely caused by government subsi-dization and other market-distorting prac-tices. While the adverse effects ofovercapacity are less visible in boomtimes, problems associated with this mar-ket imbalance become especially pro-nounced when the business cycle dips anddemand fails to keep pace with capacityincreases. In the U.S. market, the globalimbalance has led to a recurring cycle oflow-priced import surges and deteriorat-ing industry conditions, followed by peri-ods of increased trade friction.

For example, from 1997-2001, the U.S.steel market experienced an import crisis,largely due to significant overcapacity

worldwide. The U.S. market was floodedwith unfairly traded steel imports, andU.S. producers suffered drastic losses,with six manufacturers forced into bank-ruptcy. Now, while the immediate eco-nomic circumstances differ, the industryagain finds itself in the midst of a crisis,as many around the world failed to effec-tively address overcapacity and long-termmarket distortions identified more than adecade ago.

The Current CrisisSince 2000, the global steel industry hasadded nearly one billion tons in capacity,surpassing demand growth during theperiod by nearly 300 million tons. As aresult, according to the OECD, there were542 million metric tons of excess capac-ity in the steel industry as of 2012, includ-ing up to 300 million tons in China, 80million tons in the EU, and nearly 40 mil-lion tons in CIS/Russia. Largely as aresult of this overcapacity, U.S. steelimports rose by 40 percent from 2010-2012, resulting in declining prices andprofitability for U.S. producers.

Capacity Growth Has NotBeen Market-BasedThe overcapacity crisis is largely a resultof non-market-based forces. While in acompetitive, market-based industry, pro-duction and ultimately capacity followmarket signals, recent growth in steelcapacity has not tracked demand or prof-itability in the industry, resulting in thecurrent crisis. In fact, while in the previ-ous decade, global demand for steel grewby about five percent per year, apparentglobal steel usage in 2012 grew by only1.2 percent – the slowest rate since 2009.And demand growth rates are expected toremain lower in the near future.

In particular, as reflected by the declin-ing capacity utilization rates of Chinese

INDUSTRY TODAY 5

FOCUS • STEEL INDUSTRY STEEL INDUSTRY • FOCUS

The global steel industry is currentlyexperiencing unprecedented levels of overcapacity, which are severely dis-torting the global market and threateningthe continued viability of steel producersworldwide. While this crisis has recentlybecome more pronounced, it is not anew problem.

By Alan H. Price, Christopher B. Weld, & Laura El-Sabaawi

O

State-SponsoredOvercapacity:The Looming Crisis In The

Global Steel Industry4 INDUSTRY TODAY

steel producers, rates of demand growthin China have slowed considerably, whilecapacity continues to increase rapidly.Chinese steel demand grew by onlyapproximately two percent in 2012 and isexpected to increase by similar rates in2013 and 2014 – in stark contrast to themajor capacity increases in the country.These capacity increases are similarly nottied to profitability, with the vast major-ity of global capacity growth since 2000occurring in China, which has the leastprofitable steel industry in the world.

Overcapacity as a Result ofGovernment InterventionRather than market-based growth, steelcapacity continues to grow largely due togovernment intervention. Many govern-ments significantly subsidize the growthof their steel industries – includingthrough government ownership, low-interest loans, grants and low-pricedinputs – resulting in rapid and enormouscapacity increases in many countries, andcausing oversupply globally as well asmarket distortions.

Political intervention is also a key bar-rier to permanent capacity closures in theindustry. Governments often prevent millclosure to maintain employment levelsand for other non-commercial purposes.While in a purely market-based system,the power of the market alleviates excesscapacity, by forcing inefficient producersthat incur losses to leave the market, gov-ernment intervention artificially preventsthis self-correction. In the steel industry,government impediments to capacity clo-

sure, combined with legitimate market-based barriers to exit, have led to theaccumulation of persistent overcapacity.

China provides the most striking exam-ple. The unprecedented growth inChinese capacity largely results frommassive government ownership and con-trol over the steel industry. According tothe OECD, China’s government has own-ership interests in 18 of the 20 largestChinese steel producers. The Chinesegovernment also maintains a high degreeof decision-making authority over thesteel industry and intervenes extensivelyin individual companies’ operations.

The Chinese government’s significantinvolvement in its steel industry has contributed to enormous increases in new capacity and prevented the closure of inefficient capacity. The governmentfor decades has directly subsidized its steel industry through grants, prefer-ential loans, debt-for-equity swaps, taxrefunds, and other preferential policies, aswell as various forms of indirect support,such as restrictions on foreign invest-ment. China’s government also inter-venes to prevent the closure of capacity.Many older, low-technology Chinesemills, which would likely close in a purely market-based environment, havebeen supported by local governments and continue to operate, intensifyingglobal oversupply.

Turkey is another prime example. The Turkish industry has grown rapidly,from the 17th largest steel-producingcountry in 2000 to the 8th largest by2012, and the 7th largest net exporter of

INDUSTRY TODAY 7

STEEL INDUSTRY • FOCUS

steel. Such dramatic growth was facili-tated by significant government subsi-dies, including low-interest developmentbank loans, export credits and insuranceand tax benefits.

Similarly, the Indian government hasfostered its steel industry’s rapid expan-sion. The government owns at least 80percent of the Steel Authority of IndiaLtd., India’s largest steel producer.

Beyond ownership, India’s governmenthas historically intervened in its steelmarket by promoting investments andpropping up struggling enterprises withloans, loan guarantees, debt write-offs,and tax breaks, in addition to imposingimport duties, licensing requirements,and raw material export restrictions toprotect domestic producers.

Governments in other countries are fol-

lowing suit. Companies in Vietnam,Argentina, Ecuador, Peru and Bolivia, allbacked in some way by governments, areplanning new mills. The following gov-ernments also own significant shares oflarge steel companies in their countries,thereby playing a role in increased pro-duction in these countries: Indonesia (PTKrakatau Steel), Libya (Libyan Iron andSteel Company), Venezuela (Siderúrgica

GLOBAL STEELIncreases in global capacity over the past decadehave largely been led by the explosive growth ofthe Chinese steel industry. China, which nowaccounts for approximately 46 percent of worldsteel output, added a massive 750 million metrictons of steelmaking capacity from 2000 to 2012(making it responsible for more than two-thirds ofthe total global increase in capacity during thatperiod). Chinese capacity and production, unlikein the rest of the world, continued to grow steadilyeven during the 2008-2009 global economic reces-sion. As a result, the China Iron and SteelAssociation estimates its surplus at close to 300 mil-lion metric tons.

“For decades,global steel

producers havesuffered from

overcapacity inthe industry,

largely caused bygovernment

subsidization andother market-dis-

torting practices.”

6 INDUSTRY TODAY

FOCUS • STEEL INDUSTRY

STEEL INDUSTRY • FOCUS

Even more so than in previous periods,government subsidies continue to createmassive steel capacity worldwide andprevent much-needed capacity closuresand reductions in response to oversupplyand weakening demand conditions.

Solutions to the GlobalOvercapacity CrisisTo remedy the current crisis, the majorsteel-producing countries should removegovernment ownership and control, aswell as any other government involve-ment, from the steel industry. Thisincludes: eliminating government subsi-dies and other assistance (with the onlypotential exception being for certainassistance necessary to facilitate the per-manent closure of inefficient capacity);eliminating government practices thatprevent or forestall market-mandatedadjustments, including those that imposebarriers to exit the industry; removinggovernment industrial planning and deci-sion-making; removing export restric-tions on critical raw materials and othergovernment intervention in raw materialsmarkets; and removing import tariffs andtrade-distorting non-tariff barriers onsteel products.

Major steel-producing countries shouldalso remove other practices that causemarket distortions and take measures toensure a market-based, competitive homemarket. For example, countries shouldproperly enforce antitrust rules, andremove import barriers that insulatedomestic producers from competition.There is no justification for countrieswith developed steel industries, such as

Brazil, India, Russia and Turkey, to main-tain import barriers on steel products orimpose export restrictions on raw materi-als, which artificially reduce costs andinflate the export competitiveness ofdomestic producers, leading to surpluscapacity and trade distortions. In addi-tion, industries with significant excesscapacity should undergo market-basedrestructuring to eliminate inefficientcapacity, and barriers to consolidationshould be removed, as they were in theUnited States in the 2000s.

The 1997-2001 crisis, and others like it,demonstrates that the U.S. market can beadversely affected by overcapacity andmarket-distorting practices that occurelsewhere. Even after the U.S. industrytook the difficult steps to restructure, it isnot immune from the adverse effects ofimbalances and distortions around theglobe. Thus, overcapacity and other mar-ket distortions will not be remedied unlessthere is cooperation from all major steel-producing countries. China in particularmust deal with its state-sponsored overca-pacity for any solution to be effective.

If the long-term issues associated withovercapacity and other market-distortionsare not comprehensively addressed, theadverse effects stemming from theseimbalances, including unfair trade prac-tices and resulting trade friction, willundoubtedly recur. By taking meaning-ful, though often difficult, steps now, governments can help reduce theunprecedented overcapacity and avoid the cycle of import surges and tradeactions that have characterized steel tradefor decades.•

U.S. Steel Import CrisisDuring the 1997-2001 U.S. steel import crisis, excess capacity on the other side of theglobe devastated the U.S. market. Over six months in 1998, the U.S. market experi-enced record levels of unfairly traded imports, primarily from Russia, Japan, Korea andBrazil. U.S. steel producers suffered significant losses, with six companies going bank-rupt, and laid off thousands of workers, despite robust demand.

The Department of Commerce concluded that growing overcapacity – fueled bygovernment subsidies and intervention – played a major role in the crisis. Governmentsubsidies created massive capacity worldwide, and government intervention pre-vented capacity reductions in response to deteriorating demand. This governmentsupport resulted in significant global overcapacity in the period preceding the 1997-2001 crisis. Millions of tons of steel had to be diverted to overseas markets, includingthe United States, with devastating consequences for U.S. steel producers.

8 INDUSTRY TODAY

del Orinoco and Siderúrgica del TurbioSA), Pakistan (Pakistan Steel MillsCorporation), Saudi Arabia (Saudi BasicIndustries Corporation), and the UnitedArab Emirates (Emirate Steel IndustriesPJSC). Indeed, the OECD reports that 17of the largest 50 steel companies in theworld are state-owned.

Even in countries with historically market-based economies, governments

are intervening in the steel sector. SomeEuropean governments have intervenedto delay or prevent plant shutdowns, to avoid social and economic conse-quences. For example, in Italy, the government recently prevented the clo-sure of Ilva SpA’s plant, which produced30 percent of Italian 2012 steel output,out of concern that closure would be ashock for the country’s economy. And

the French government recently threat-ened to nationalize two ArcelorMittalblast furnaces when the companyannounced it would mothball them due tochronic overcapacity.

These examples demonstrate thatgrowing overcapacity in the global steelmarket continues to be due in large partto government subsidies to and interven-tion in steel industries around the world.

FOCUS • STEEL INDUSTRY