European steelmakers point the finger at China

Nov 13, 2015

 Wholesale blocking of steel imports will do more harm than good

Where the steel industry is involved, especially in rich countries, shuttered plants, job losses and complaints about unfair competition are rarely far away.

Having seen global steel prices halve over the past year, European steelmakers are ratcheting up their choruses of complaint. On Monday they demanded blocks on cheap steel imports, particularly from China, and lower energy input prices.

The impact of steel plant closures can be devastating for local communities. The recent closure of the Sahaviriya Steel Industries (SSI) plant at Redcar in north-east England was a severe blow to a town with few other job opportunities. But resorting to wide-scale protectionism is only likely to displace job losses elsewhere. And while there is certainly a case for the EU to revisit the cost of power to energy-intensive industries, it is not clear that would do much to mitigate the damage the steel industry is sustaining.

Steel has long been a battleground for trade disputes. With high fixed costs of production, and exposed to large swings in demand from the economic cycle, the industry goes through repeated phases of overcapacity, glut and falling prices, with governments implored to intervene to keep production going and preserve jobs.

European steelmakers have frequently had recourse to antidumping and antisubsidy tariffs to tackle low-cost products entering the EU market. A larger-scale use of such “trade defence” measures is likely to do more harm than good. Not only does it risk inflaming EU-China trade tensions more generally, but raising the price of steel in Europe will merely disadvantage other manufacturers.

Steelmaking is of great importance to local communities, but it employs only about 1 per cent of the 30m total manufacturing workers in Europe. Since steel is a vital input to large parts of manufacturing, holding prices in the EU above the global level merely spreads international uncompetitiveness more widely through the sector. The future for European manufacturing is in high value-added production, such as Germany’s successful machine tools sector, not in churning out basic commodities in a fickle global market.

The industry, or at least parts of it, is on somewhat firmer ground when it complains about energy costs. Successive iterations of energy taxes and levies aimed at combating climate change have undoubtedly made industrial electricity more expensive. But that is often a bigger problem between different EU states than it is between the EU and the rest of the world.

UK producers, for example, complain their electricity is more than 50 per cent more costly than for competitors in France or Germany. But the European Commission last year found that while electricity prices for EU companies as a whole were twice those in the US and 20 per cent higher than in China, the differential with the US disappeared once tax and levy exemptions for European energy-intensive industries were taken into account.

Moreover, energy inputs are on average only about 5 per cent of total production costs for the EU iron and steel industry. Electricity prices relative to those elsewhere would have to change spectacularly to have a decisive effect.

European authorities should certainly remove distortions applicable to all industries, such as differential electricity pricing within the EU. But in a fiercely competitive global commodity market marked by producer overcapacity, the only kind of government intervention likely to give steelmakers what they want would most probably end up kicking off a major trade war and doing more harm than good.

Source: The Financial Times