A New “Global Forum” to Address Global Steel Overcapacity
September 23, 2016

Earlier this month, leaders at the G-20 Summit in Hangzhou, China announced the need for a “collective response” to the problem of global steel overcapacity.  To that end, the G-20 members agreed to the creation of a Global Forum to address the significant excess capacity in the worldwide steel industry.      

There is no question that there is an urgent need for coordinated action on steel overcapacity and market distortions causes.  According to the OECD Steel Committee, which met just following the G-20 summit and subsequently shared its finding with G-20 members on September 9th, the outlook for steel overcapacity is bleak.  Global steel capacity is expected to increase by 58 million metric tons between 2016 and 2018, reaching 2.4 billion metric tons by 2018.  At the same time, the OECD Steel Committee projected that world GDP growth will remain weak and steel demand will remain low, expected to reach only 1.5 billion metric tons in 2016.  In fact, the world is already facing hundreds of millions of metric tons of excess steel capacity, and actual steel production has again begun to increase on a year-on-year basis.  These data, promising an even wider gap between global steel capacity and demand, has caused the Committee to repeatedly warn against “unsustainable oversupply” and the “urgent structural challenges” that “remain unaddressed.”    

The question remains whether the most recent promises regarding action on steel overcapacity will amount to progress.  The OECD Steel Committee has continually voiced concerns regarding global steel overcapacity over the past several years, including directly with China and India (who, although not OECD members, are invited to attend Steel Committee meetings given the size of their industries).  The United States and the European Union have raised the issue on multilateral and bilateral bases with China, but have had to settle for, at best, nonbinding “commitments” from China with little, if any, follow through.  Domestically, Congress has urged the Obama Administration to remain vigilant in addressing China’s steel overcapacity, along with other key trade issues with China such as government subsidies, state-owned enterprises, and its non-market economy status.  In April 2016, Commerce and the U.S. Trade Representative hosted two days of public hearings on the global steel industry and its impact on the U.S. steel market.

In many ways, as China has admitted, the fact that steel capacity and production is so misaligned with demand is a domestic industrial policy challenge.  As Treasury Secretary Jack Lew explained in late August, “What they {China} need to do is tackle the very real challenge of pressing these changes down into the provinces, where steel capacity is owned by state-owned enterprises and other powerful interests, where they’re employing a lot of people, and it’s not just the local economy but the political and social system as well.”  Yet China has done little to tackle the steel glut at home.  Moreover, the distortions created by government control, preferential trade policies, and subsidization are not limited to China’s steel sector – the Government of China continues to support key industries such as raw materials/elements, chemicals and petrochemicals, high-tech equipment, agricultural products, and downstream metal products.  The “propping up” of these industries allows Chinese products to flood the United States and other markets at unfairly low prices.    

The stated purpose of the new G-20 Global Forum is to “take steps to address steel excess capacity and encourage adjustments, and to report back to the G-20 in 2017.”  It echoes the OECD’s high-level meeting held in April of this year to address “excess capacity and structural adjustment in the steel sector,” which resulted in a joint statement by leading OECD members on dealing with the systemic factors contributing to global overcapacity.  China refused to join the statement or work toward productive outcomes, thereby preventing broad consensus.  Perhaps China’s response to the G-20 multilateral effort to “encourage” the major political and industrial changes necessary to curb steel overcapacity will be more constructive, but not likely.