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Steel rush euphoria

By Johnny Erling
Ein Bild von Johnny Erling aus dem Jahre 2017

The message from the two super agencies was not an April Fool’s joke, but it read like one. The National Development and Reform Commission (NDRC) and the State Inspectorate of Industrial and Information Technology (MIIT) jointly declared war on steel overproduction on April 1. They plan to get underway as early as 2021 to cut excess capacity and reduce CO2 emissions in the new Five-Year Plan. With a “look back” inspection, they would scour the country to find out why the same campaign to cut China’s steel mountains failed five years ago.

That sounds determined but will come to nothing. Because for the dismantling of old blast furnaces between 2016 and 2020, a lot of new capacities were added on the quiet. The culprit was Beijing, which had stimulated China’s crippled economy with subsidies in the last Five-Year Plan and in 2020 gave the construction and automotive sectors a major boost in the fight against COVID. Steel prices and demand promptly went through the roof. The two ministries admit as much: “Regions and companies blindly followed the impulse to bet on new steel projects. The capacity reduction could not be consolidated in this way.” In plain language: China’s provinces and industries were racing to produce crude steel because it was profitable for them to do so. The World Steel Association recently noted with alarm: In 2019, the People’s Republic produced 996 million tons of crude steel, more than half of the world’s output. A year later, it set the bar even higher. In 2020, China produced 1.065 billion tons, according to Reuters.

Flooding the world markets

The insatiable appetite for steel is déjà vu. It has been in the DNA of his Communist Party since Mao’s time. Thanks to the half-baked mixture of market and planned economy, in which the state can flick the market mechanism on and off like a switch, steel went from being a scarce commodity in socialist states to a surplus product in China. The world markets tried in vain to seal themselves off from the subsidized steel glut from China with punitive tariffs and anti-dumping procedures.

But there were warnings. In 2009, the EU Chamber in Beijing identified overcapacities in Chinese industries, especially steel, in a 50-page study. The president of the chamber at the time, Jörg Wuttke, spoke of “destructive consequences” for China and for the global economy. In 2015, a second Chamber study appeared because, Wuttke said, “The situation has changed from bad to dire.” In 2008, China had produced 512 million tons of crude steel. In 2014, it was 813 million tons. Between 2004 and 2014, global steel production increased 57 percent. China accounted for 91 percent of that.

This April, the Office of the New United States Trade Representative (USTR) denounced the People’s Republic as the world’s leading “producer of non-economic capacities”. The unwieldy phrase serves as justification for new punitive tariffs. China’s “continued bloat of steel production, plus its growing inventories and incentives for exports, threaten to flood global markets with excess steel at a moment when the global steel industry is trying to recover from the demand shock caused by the COVID-19 pandemic”.

Steel boom and climate plans do not go together

Beijing would have good reason to reorganize its steel mess. President Xi Jinping made a climate policy commitment to his country to achieve maximum greenhouse gas emissions by 2030 and to make it carbon neutral by 2060. To do that, he would have to get to the steel. According to China’s calculations, the metallurgical industry alone accounts for around 15 percent of national CO2 emissions.

But steel is addiction (China.Table reported). Mao fell for it in Moscow in late 1957. Spurred by Soviet leader Nikita Khrushchev’s Sputnik success and his ostentatious announcement that he would overtake the United States in production in 15 years, Mao promised to do the same to England in 15 years. Back in Beijing, he lined up 60 million Chinese to “cook steel” and build 240,000 small blast furnaces. Propaganda posters of the time show glorified workers lifting steel into the red sky with a Soviet satellite flying. More steel and more grain became magical symbols of Chinese communism.

“In the Great Leap of Steel Production,” Mao called for doubling China’s output from 5.35 million tons of steel in 1957 in one year. On December 19, 1958, Xinhua cheered: 60 million workers had met the goal of 10.7 million tons of steel. It later turned out that barely eight million tons were usable. Everything else was slag.

Chinese party historians traced how Mao constantly changed his claim to overtake Britain in 15 years. On May 18, 1958, he proclaimed that China “will have caught up with Britain in as little as seven years. And another eight to ten years later, we will have caught up with the United States.” The formula was now “Chao Ying Gan Mei” (超英赶美) overtake Britain and catch up with the US.

Special stamps for the steel record

Despite all the terrible setbacks, Beijing’s obsession with steel did not wane. The People’s Republic was the only country to celebrate itself with two special stamps when it managed to produce more than 100 million tons of steel in 1997, a world record. One stamp shows iron smelting in ancient times, where China also claims to have been number one.

Beijing can’t get off the high steel track. Because it needs even more steel for its rearmament, at the center of which is the expansion of the navy. Just as it once was in Germany or Japan. Seen in this light, the latest message on steel reduction seems like an April Fool’s joke.

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