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Making and shaping a steel market the Chinese way


SINGAPORE The usual chorus of indignation from China's steel industry followed the U.S. government's imposition of stringent anti-dumping and countervailing measures against welded steel pipe from China.

The measures will effectively wipe out the U.S. market as a destination for Chinese welded pipe, and the Chinese producers are understandably unhappy. As in all of China's myriad trade disputes, various bodies in Beijing asked that the "long-term interests of Sino-U.S. trade" be taken into account, and appealed for harmony and better understanding.

There is some politicking on both sides, but in general the opacity of Chinese industry makes it easy to assume wrongdoing. And often that's been the case, with U.S. lobby groups alleging that the Chinese steel industry benefits from huge energy subsidies.

Across the board, whether it be pipe to the United States or any product exported to a different, sensitive market, the Chinese are fighting a variety of disputes, and the way their internal markets work doesn't inspire much confidence.

Take the case of stainless products. Exports of stainless strip from China have caused consternation in various markets as producers in developed countries try to understand how the Chinese are able to achieve such low prices. One of the most recent revelations to come out of China is that the stainless producers and their raw material suppliers may be working in collusion to allow steelmakers to procure raw materials at below-cost price, and therefore sell on the market at highly competitive prices. Stainless steel producers give a subsidy to producers of cheap nickel pig iron in order to allow them to sustain output of the material, which is much cheaper than buying refined nickel.

There is some doubt as to whether this form of profit-sharing is illegal according to international rules, but it's certainly not the kind of thing that any overseas stainless producer is going to be particularly happy about. Could they, or would they, enter into a similar arrangement with their suppliers?

The stainless market provides a front-row seat from which to view China's collegial way of doing business in action. Stainless producers get together every month to decide how to approach the market for the following month. The meetings—led by China's largest stainless steelmaker, Taiyuan Iron & Steel (Group) Co. Ltd.—tend to set both prices and production volumes. It's a collective effort to steer the market, which is practiced somewhat openly in China but just about everywhere else would be called collusion.

That's not to say such practices do not go on elsewhere, but they likely would be illegal and thus conducted in a more clandestine fashion. In China, where the industry remains solidly backed by the state, it is the norm.

Most foreign companies with a presence in the Chinese market simply shrug their shoulders and say "this is China" when discussing such matters, but can Beijing really expect to generate the international harmony it desires while its markets are operated in such a manner?

There has been a lot of concern on China's part not to upset its foreign partners, but the principal method for avoiding this has involved changes to the country's export tax regime. When a problem arises in a particular market, the government slaps on an export tax; if it doesn't work, it increases the tax.

Export taxes amount to a rather clumsy, retroactive way of approaching the problem and deliver mixed results—the country's steel exports have ominously started rising again. The latest figures showed that total exports rose well beyond 5.5 million tonnes in May, marking the third monthly increase in a row despite assurances from Beijing that the problem was under control.

In one sense, China is trying to tackle the root causes of these issues. It is confronting the fragmentation of its steel sector and attempting to exert more discipline over the industry. But many argue that there needs to be a lot more progress made in regards to the way its internal markets function.

While much overseas criticism aimed at China could be little morethan political bluster and at least some of the trade actions against China questionable, it remains to be seen if Beijing will stop appealing to the kinder, gentler nature of foreign counterparts and develop a more concrete approach to these pressing issues.

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