China is dumping steel on the global market

China is the world’s biggest steel producer. In recent years Chinese steelmakers have struggled with overcapacity and – like other producers from other non-EU countries – have resorted to unfair trade practices including dumping and illegal subsidies. These producers sell their steel abroad at below the actual cost of production, thus artificially pushing down the price levels. The unfairly cheap imports harm European producers in and outside Europe, driving European steel out of the market. The European Commission protects domestic steel producers against unfair competition by anti-dumping tariffs. However, since 2016 it has had to radically change the strategy it uses to prevent the flooding of the market by cheap Chinese steel.

On entering the World Trade Organization in 2001, China made a concession to the other members, agreeing that for the following fifteen years, they would not have to use Chinese prices and production costs in the calculation of anti-dumping duties. Instead, the tariffs were calculated based on the price levels in comparable countries that were considered market economies. The EU used as reference values e.g. prices in the United States, Turkey or South Africa. However, 2016 saw the expiration of this exception, included in China’s WTO accession protocol, and the European Union had to adjust its anti-dumping rules.

From 2018 on the Commission does not distinguish between market and non-market economies. Instead, it assesses the role of the government and its relative impact on the market environment in the exporting country:  the extent to which the market is dominated by state-owned or state-controlled companies, whether or not domestic producers have access to cheaper funding or to raw materials and energy at artificially lowered prices. If such conditions are found to exist, the Commission calculates the anti-dumping tariff based on the international price of the exported goods or on the production costs in countries that are in the same stage of development as the country in question but have standard market environment.

According to EU-commissioned impact studies, the above-mentioned change of methodology will have little impact on the overall level of anti-dumping tariffs levied on Chinese imports. The average tariff level of 39 per cent is expected to drop only slightly after the reform, to an average of 35 per cent.

The first market situation report that will provide basis for the Commission’s assessment of anti-dumping cases is dedicated to China. State-owned enterprises play a key part in the Chinese steel sector, being responsible for over one half of all steel produced in China. Four of the five biggest Chinese steel companies – which also rank among the ten biggest steel producers globally – are controlled by the state.  State metallurgical plants often form part of vertically integrated groups that operate e.g. their own iron ore mines.

In the steel sector, as in other sectors of the Chinese economy, state companies serve as tools for the implementation of the government’s long-term industrial policies.  State enterprises must carry out the government’s plans and policies and abide by the directives issued by the government and the Communist Party. Unfortunately, the Chinese five-year development plans have ignored the actual demand for steel in the Chinese market, leading to surplus production capacity. In 2015 this surplus capacity was estimated to be 400 million tonnes a year; in 2017 it was 350 million tonnes. Regrettably, the statistics provided by the Chinese government are not fully reliable.

Earlier investigations pursued by the European Commission have revealed that state-owned Chinese companies act as price makers in the steel products market. Not having sufficient market power, the private producers are relegated to the position of price takers and in some cases are forced to accept economically unjustifiable prices.

Steel companies that follow governmental and party policies enjoy preferential access to cheap credit.  This also applies to companies that implement the government’s 2016 plan for the gradual phasing out of a part of the national production capacity. These companies get loans with lower interest rates or more advantageous terms for bond subscription and the use of credit for acquisitions. A key role in this respect is played by state-owned banks that operate as an extended hand of the government, providing companies with unfair state support.

In the case of hot-rolled products, the European Commission has identified several types of long-term state support provided to Chinese producers. They can use state-owned land on advantageous terms, enjoy preferential tax treatment, obtain government subsidies, and have access to cheaper inputs, e.g. water or electricity. At the same time, the government restricts the export of steel-making inputs such as iron ore, coke, coking coal, pig iron, crude steel, chromium, manganese, molybdenum or other alloying elements such as tin, zinc or tungsten. The Chinese government’s aim is to maintain lower price levels of steel-making inputs compared to global market prices.

The above-mentioned advantages enable the Chinese producers to export their products at significantly lower prices than those offered by rival companies from countries where competition is strong and no preferential treatment is allowed. The European Commission will therefore take these findings into account in its assessment of future anti-dumping cases.