URSABLOG: Steel Barriers

I find myself this week in the rather curious position of being grateful to Donald Trump. It is probably already apparent that I am not his biggest fan, but maybe my own opinions and prejudices have had the upper hand recently. Don’t worry; I am not going to start condoning Nazism, or painting myself orange. But sometimes our prejudices can blind us when some of their actions, intentional or otherwise, may be beneficial.

It was reported this week that back in July Donald Trump rejected a Chinese offer to cut steel overcapacity, despite endorsement by his top advisers, including his shipping-friendly commerce secretary Wilbur Ross. Trump rejected a 150 million tonnes cut by 2022 in favour of finding ways to impose tariffs instead. Even though Ross, a long-time personal friend of Trump, proposed it twice he was pushed back, forcibly, reportedly looking shocked when he returned to the discussions he was having with the Chinese Vice Premier Wang Yang. Economic nationalism had gained the upper hand.

Maybe we should breathe a huge sigh of relief. MSI recently calculated in their quarterly report that using their base case scenario a 2% fall in Chinese steel output would mean a 50% weaker capsize market all other factors remaining constant. These numbers are frightening, if taken at face value. In 2016 the reported crude steel output in China was 808.4 million tonnes. 30 million tonnes reduction annually until 2022 means an approximate 3.7% decrease. Ouch.

But the numbers are hard to clarify, especially in China, as we know. Back in March of this year the north eastern city of Tangshan became the focus of an investigation ordered by no less a person than President Xi himself into falsely reported plant closures that remain open. The falsification of the figures are a mixture of inefficiency, corruption, political manoeuvering and local economics. Either the mills remain open or the local authorities include already idle mills in their figures. According to Greenpeace, two thirds of the reported output cuts last year came from mills that were already idle.

We should also consider the difference between output and capacity; the former being variable, the latter constant. A reduction in output can be reversed by an increase. A reduction in capacity is, well, more final. Paradoxically Xi’s investigation is a tacit admission that China cannot offer definitive proof that overcapacity has been cut. Maybe that was something Xi was counting on.

So Trump wants tariffs not cuts, but it should come as no surprise that politics, especially the toxic version of the current White House, has prevailed.

China can always find ways to work around tariffs however. Vietnam is currently being investigated by both the EU and the US for shipments of Chinese produced metals through Vietnam to avoid tariffs. This is a big deal: Vietnam experienced a tenfold increase in exports of steel to the US in 2016.

Vietnam is not just a huge transshipment port, and heavy industry is becoming increasingly important to them. A huge blast furnace is being built in Ha Tinh province involving investment and know-how from companies from the usually mutually antagonistic countries of Vietnam, China, Taiwan, Japan and South Korea. Formosa Plastics placed the construction order with the Chinese SOE China Metallurgical Group. Other investors include China Steel — Taiwan’s biggest steelmaker — and JFE Steel of Japan. Also involved as contractors are Posco and Samsung C&T from South Korea. All you need is North Korean companies providing security and Thai’s providing the catering, and you have the full improbable package.

Vietnam needs this investment badly so will be worried if one of the main reasons for the construction of this mega plant, their access to world markets, is restricted by punitive anti-dumping measures by the EU and the US.

This type of business co-operation that provides hope to me for better co-operation, even when diplomatic relationships are strained. This is nothing new, and not just restricted to steelmaking. Japanese, Chinese and South Korean companies have between them provided US$ 16.7 billion worth of debt to build coal powered electricity plants in Indonesia, despite scaling back coal powered electricity generation in their own countries in accordance in the Paris Agreement. The expertise and the capital has to go somewhere.

And this is the problem with tariffs: they are an outdated and blunt instrument to use in an increasingly interconnected world. Money moves quicker than politics, and will find a way to ensure a return, despite the obstacles that are thrown up to restrict it. Leaving aside that tariffs have been proven to restrict development rather than protect it, just like nationalism has been proven to be harmful economically, the ultimate fundamental demand for steel products is unlikely to be much affected by trade barriers.

Trump may well find that imposing tariffs will prove more harmful to the US economy and jobs. A happy side effect may well be the increase of tonne mile demand as trade routes are distorted to service the new reality, and shipowners may well benefit. I am not suggesting for a moment that Trump’s motivations were sound, but he may have hit on something by accident, something that could affect the dry bulk shipping market positively.

This is speculation, of course, but it also reminds me that the dry bulk recovery is still at a delicate stage. If China’s offer of a reduction of steel production overcapacity had been accepted by Trump and actually been acted on, then this would have dealt a severe blow to owners of bulk carriers. By insisting on tariffs, Trump has given the shipping industry a reprieve of sorts.

Before I crack open the champagne to toast the president, I am struck with the rather sobering thought that China is now so big and important to shipping that an easy political gesture given to mollify a cantankerous US administration could so easily have sent us back to 2016 very quickly. I don’t think that protectionism is a good idea, I don’t trust Chinese statistics, and I don’t like Trump, but an aggressive and economically illiterate policy has nonetheless given shipping some breathing space. That is worth a glass or two of good red wine at least.