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China Produces High-Cost Steel |
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Written by LNC
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Thursday, 05 November 2009 |
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The following letter appeared in the Wall Street Journal on November 3, 2009 and was written by Michelle Applebaum of Steel Market Intelligence.
China Produces High-Cost Steel
Your terrific article on China's latest attempt to rein in its high-cost steel industry ("China Takes a Hard Look at Its Steel Industry," Marketplace, Oct. 13) misses what I think is the key point in the "math" of why China needs to cut back. You say that the beneficiaries of Chinese cutbacks would be in "high-cost areas like Europe and North America." Actually, both regions are lower-cost steelmaking regions, largely because of more efficient scales of operation as well as lower-cost raw materials. In today's steelmaking universe, raw-material access is far more important than low-wage rates, so the comparative advantage rests with much of the West. This is a key reason why the Chinese need to cut back their least efficient mills.
Despite these attempts, the provinces have been pushing back on Beijing's half-dozen attempts to cut production since 2004. None have worked. Beijing has been using a carrot-and-stick process, attempting to encourage closures while providing subsidies for exporting excess steel to bailout these high-cost players. The problem is that the Chinese are using a far too sweet carrot—subsidies—and a fairly limp stick.
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