Steel : Protectionism Won't Work

The agreement on capacity cuts in steel reached at the Paris meeting of producing countries this month is under threat of being undermined by a US proposal to impose tariffs on imports. The International Trade Commission, a US government agency, has recommended duties of up to 40 per cent on most import items, in a bid to protect the high-cost, loss-making US steel industry. Steel exports to the US, including from India, will virtually dry up if president Bush endorses the tariffs in February 2002. The European Union has already declared that the Paris deal would not be implemented if the US went ahead with its import curbs. The EU is also preparing for action at the WTO if the US does not back off. With the hardening of positions, some tough bargaining must precede any concerted international effort to shore up the global steel industry, which is facing its worst crisis in decades, with a production glut and poor demand pushing down prices to 20-year lows.

The Paris meet – which was attended by all 30 OECD countries and other major producers such as China, Russia and Ukraine – reached a broad deal on capacity cuts of up to 97.5 mn tonnes by 2010. The reduction will be effected through a combination of market forces and policy measures such as withdrawal of government subsidies. The meeting was careful not to characterise the deal as one involving production cuts for fear of inviting allegations of cartel-like behaviour; however, the closure of inefficient, unviable plants in some countries is expected to lead to a drop in output. The current global capacity of 1bn tonnes a year is estimated to be surplus to the tune of 150 mn tonnes. The glut has also generated huge inventories that need to be worked off. But layoffs due to closure of steel plants will have political costs, even in the US where steelworkers are still a force to reckon with. Countries such as Russia and Ukraine, which export more than half their output, will find it especially difficult to shut down unviable units.

The US, the world's largest market for steel, imports over 30 mn tonnes every year. A tariff wall keeping exporters out of the US market will therefore see cheap steel flooding other markets such as EU, further knocking down prices. A trade war between the US and EU will only prolong the agony of the industry everywhere, including India. Indian exports of hot-rolled coils (HRC) are already locked out of the US market for five years with the imposition of anti-dumping and countervailing duties earlier this year. Hot-rolled steel exports to the US, India's largest export market, had earned Rs 900 crore in 2000. Although India, with just a 2 per cent share, is a small player in the world market, the major scale of steel trade (40 per cent of all steel produced is traded globally) means that fresh convulsions in the sector are bound to have an adverse domestic effect.

However, there is still some glimmer of hope for Indian steel exports. The proposed tariffs by the US will hit cold-rolled, galvanised and colour-coated steel, but will leave out stainless steel. This should allow companies with big stainless steel capacities, such as Jindal Strips and the Salem steel plant, to push for greater exports. The commerce ministry recently recommended provisional anti-dumping duties on imports of cold-rolled stainless steel flat products from the US, EU, Japan and Canada. Most other producing countries are similarly looking for export markets even as they raise barriers against imports. Indeed it is this rampant protectionism that has allowed inefficient steel units in several countries to survive, to the ultimate detriment of the entire industry.

Reeling under losses and bankruptcies, steel companies in the US have finally bestirred themselves to move in the direction of consolidation. The EU and Japan have already put through several merger deals in a bid to acquire synergies of manufacturing and marketing. The Indian steel sector is staggering under the weight of massive debts, huge half-complete projects, stagnant demand and falling prices. The price of hot-rolled coil, a basic flat product, has collapsed to Rs 10,000 a tonne from Rs 17,000 a tonne just over a year ago. Domestic demand for steel products has been badly hit by the economic slowdown. Almost all steel companies in the country are awash in red ink except Tata Steel which, as a result of a three-year cost-cutting drive, now claims the distinction of being the lowest cost steel producer in the world.

Indian financial institutions, which have huge exposure to the steel sector, are now reported to be considering industrywide revival strategies, including mergers and alliances, to turn around some of the biggest loss-makers. Much depends on how the plan is put into action. Recently the FIs' curious attempt to revive two ailing steel companies by taking over management control came to nought. Consolidation will help realise efficiencies of cost and scale and needs to be pursued if the industry is to return to health. Protectionism to cover up inefficiency will not work for the industry, in India or anywhere else.