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Trade Dynamics and Challenges in the Global Steel Industry

GOOVER DAILY REPORT August 26, 2024
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TABLE OF CONTENTS

  1. Summary
  2. Trade Barriers and Protectionist Measures
  3. Latin American Steel Industry
  4. Mexico’s Rising Role in the Steel Industry
  5. U.S. Steel Industry Dynamics
  6. China’s Influence on Global Steel Market
  7. Conclusion

1. Summary

  • The report 'Trade Dynamics and Challenges in the Global Steel Industry' explores the intricate trade relationships and challenges across various geopolitical regions, including China, Mexico, Latin America, and the U.S. It delves into trade imbalances, protectionist measures, and the influence of political decisions on trade dynamics. Key findings include the rising trade barriers against China in Southeast Asia, the impact of protectionist policies on Chinese steel exports, the role of the RCEP in shaping regional trade, and the challenges faced by the Latin American steel industry due to primarization. Additionally, the report examines the compliance and growth of the U.S.-Mexico steel trade, the influence of tariffs on the U.S. steel industry, and the strategic moves of China in the global market, particularly regarding electric vehicle exports to Mexico, aiming at circumventing U.S. trade restrictions.

2. Trade Barriers and Protectionist Measures

  • 2-1. Rising trade barriers in Southeast Asia

  • As of August 2024, China is confronting an increasing number of trade restrictions from Southeast Asian nations. This surge in barriers is largely a response to supply chain adjustments and is compounded by China's ongoing industrial overcapacity issues. Notably, Vietnam has initiated an anti-dumping investigation targeting hot rolled coil steel from both China and India. In the first half of 2024 alone, 96 investigations concerning trade barriers directed at China were reported, surpassing the 63 investigations conducted throughout 2023. Additionally, it was revealed that at least 74 of these inquiries pertained to anti-dumping practices.

  • 2-2. Impact of protectionist policies on Chinese steel

  • Protectionist measures in various countries have significantly affected Chinese steel exports. A notable example includes the rising complaints lodged by trade partners such as the United States, India, and the European Union against China. In the first half of 2024, China shipped approximately 11.9% of its total steel exports to Vietnam, which has become the focal point as a destination for such exports. The collective efforts of Asean nations to combat the imports of cheap Chinese steel threaten to disrupt the dynamics of global steel trade, amplifying concerns about potential economic dependence on Chinese imports.

  • 2-3. RCEP implications on trade

  • The Regional Comprehensive Economic Partnership (RCEP), which came into effect in January 2022, has been pivotal in shaping trade relationships in the region, despite the accompanying rise in protectionist sentiments. Although RCEP offers a framework for reducing trade barriers among its member countries, it still permits protective measures under certain circumstances. Analysts note that while the RCEP may facilitate trade in some respects, the overall shift toward protectionism reflects deeper concerns about local market vulnerabilities and the competitive pressures posed by Chinese imports.

3. Latin American Steel Industry

  • 3-1. Challenges of primarization in Latin America

  • The term 'primarization' refers to the reliance on the export of raw or semi-finished materials, which poses a significant challenge to the Latin American steel industry. Paolo Rocca, President and CEO of the Techint group, indicated that to combat this issue, Latin American countries need to reposition their value chains, reshore, and export higher value products. The rise of China's share in the global economy from 5% in 1995 to 35% in 2020 has severely affected Latin American economies, contributing notably to their primarization.

  • 3-2. Reshaping through regional collaboration

  • Rocca emphasized the need for increased regional and inter-regional collaboration among Latin American mills. He noted that while Latin American steel mills can compete with most non-Chinese mills, competition with heavily subsidized Chinese manufacturing remains impossible. Countries within the Mercosur agreement, including Brazil and Argentina, must work towards greater integration in their steel industries to enhance their competitiveness in the global market. Current trends show that collaboration with industrial partners, particularly in the US, is already benefiting Mexico's steel industry through nearshoring accords.

  • 3-3. Impact of protectionism and decarbonization

  • The increase in market protectionism and regional fragmentation has been marked by strategic tariffs and subsidies associated with decarbonization goals from countries such as the US, Canada, Mexico, the EU, and Japan. While the per capita steel consumption in Latin America has grown over the past 15 years, the region's economic conditions—characterized by high taxes, interest rates, and significant state involvement—have made funding necessary for decarbonization more challenging. Despite Brazil's relatively low CO2 emissions from its steel industry, support from the federal government is deemed essential for successful decarbonization efforts.

4. Mexico’s Rising Role in the Steel Industry

  • 4-1. Growth in U.S.-Mexico steel trade

  • The steel trade between the United States and Mexico has seen significant growth, with Mexico's shipments of steel to the U.S. increasing dramatically since the 2019 agreement aimed at regulating steel exports.

  • 4-2. Mexico’s compliance with the 2019 steel export agreement

  • Despite an initial agreement in 2019 that aimed to limit the volume of steel exports from Mexico to the United States, Mexico has violated this agreement. Shipments have exceeded the set levels by a staggering increase of 472% above the 2019 limits and are projected to reach 700% above those levels this year.

  • 4-3. Impact of U.S. tariffs on Mexican steel

  • In response to Mexico's continued non-compliance with the 2019 agreement and the surge in steel imports, the Biden administration announced a 25% tariff on steel products melted, poured, or cast outside North America. However, this measure fails to effectively address the issue of Mexico's steel imports because it only impacts approximately 9.8% of Mexico's steel exports to the U.S., allowing 90% to remain duty-free and continue flooding the market.

5. U.S. Steel Industry Dynamics

  • 5-1. Impact of import strategies and tariffs

  • Import tariffs have significantly shaped the U.S. steel market. The U.S. tariffs have effectively set a higher price floor for domestic steel, with a noted $100 per ton increase in the floor price. In scenarios of strong demand, these tariffs can add approximately 25% to the overall steel price. The average price for steel is projected to remain elevated at $750-$800 per ton, which is now considered the new norm. Tariffs and government policies have played crucial roles in creating a disciplined supply management approach within the U.S. steel industry.

  • 5-2. Citi’s outlook on U.S. steel prices

  • Citi Research recently updated its outlook for steel prices in 2024, presenting a mixed perspective on both short-term and mid-term market dynamics. In the short term, steel demand is expected to be weaker due to several factors, including a 5% decline in the construction sector driven by tighter credit conditions. Despite this, demand from the automotive sector is expected to grow modestly by 1.5 million units. Current economic forecasts suggest a slowdown in U.S. economic activity, with an expected GDP growth of around 1.1% and potential Federal Reserve rate cuts. In the mid-term, factors like re-shoring and infrastructure investments are anticipated to support demand. Citibank anticipates steel prices will be under continued pressure, projecting hot-rolled coil prices to range between $650 and $1,100 per ton until demand recovers.

  • 5-3. Struggles with Mexican steel imports

  • U.S.-Mexico trade dynamics remain contentious, particularly concerning steel imports. Despite a surge in Mexican steel exports to the U.S. that exceeded pre-S232 levels, these exports decreased in 2024 due to new regulations aimed at preventing transshipment. Currently, the trade balance shows that the U.S. remains a net exporter of steel to Mexico, especially in flat products, while Mexico continues to import more steel from China. The relationship has been complicated by evolving market conditions and political factors affecting trade agreements.

6. China’s Influence on Global Steel Market

  • 6-1. China’s export strategies amidst U.S. tariffs

  • Chinese electric vehicle makers have shifted their focus to markets outside the U.S. due to the imposition of tariffs. In the past year, China emerged as the leading car supplier to Mexico, exporting $4.6 billion worth of vehicles, as reported by the Mexican Ministry of Economy. This strategy aims to circumvent U.S. trade restrictions while tapping into the booming Mexican market. Industry experts have suggested that this trend could allow Chinese companies to use Mexico as a channel to enter the American market.

  • 6-2. Impact of Chinese EV market on Mexico

  • The influx of Chinese electric vehicles (EVs) into Mexico has raised concerns among U.S. officials, who fear that Mexico might serve as a 'backdoor' to the U.S. market. Chinese manufacturers like BYD have invested in Mexico and consider establishing factories in various states, such as Durango, Jalisco, and Nuevo Leon, which could create approximately 10,000 jobs. The competitive pricing of Chinese EVs has attracted many Mexican consumers, including those who were previously hesitant to adopt electric vehicles.

  • 6-3. Trade concerns between the U.S., Mexico, and China

  • The U.S. is apprehensive about the growing presence of Chinese automakers in Mexico, especially with respect to the potential circumvention of trade regulations set by the United States-Mexico-Canada Agreement (USMCA). Under USMCA, there are provisions that could allow Chinese products manufactured in Mexico to enter the U.S. market duty-free if certain criteria are met. This has raised alarm among U.S. lawmakers and manufacturers, who view the situation as a significant threat due to the lower production costs of Chinese competitors.

7. Conclusion

  • The report underscores significant findings about the global steel industry's complexities, driven by geopolitical tensions, trade policies, and economic strategies. Notably, the rise of protectionist measures, such as those witnessed with RCEP and by entities like Techint, reflects countries' endeavors to shield domestic markets from competitive pressures, notably from China. However, this protectionism often escalates trade tensions, as seen in the U.S.-Mexico trade interactions under USMCA. Moreover, Chinese companies like BYD are strategically leveraging markets like Mexico to mitigate trade barriers, underscoring the interconnectedness of global trade policies. The findings reveal a pressing need for balanced trade policies that harmonize economic benefits with sustainable industry practices. Future research must focus on continuously monitoring these trade dynamics to facilitate the development of nuanced policies. Practical applicability includes fostering regional collaborations and better integration of trade agreements to mitigate the adverse effects of protectionism and encourage resilient economic growth. As the global steel market evolves, stakeholders must prioritize adaptive strategies to navigate the challenges and leverage emerging opportunities effectively.

8. Glossary

  • 8-1. RCEP [Trade Agreement]

  • The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement aimed at enhancing economic cooperation among member countries. In the context of this report, RCEP's potential to either facilitate cooperation or allow protectionist measures is evaluated.

  • 8-2. Techint [Company]

  • Techint is a global corporation focusing on engineering, construction, and steel production. This report addresses the viewpoints of Techint’s CEO on regional collaboration and reshoring initiatives within the Latin American steel industry.

  • 8-3. USMCA [Trade Agreement]

  • The United States-Mexico-Canada Agreement (USMCA) is a trilateral trade agreement that replaced NAFTA. It plays a significant role in facilitating trade between these countries and is a crucial factor in the discourse around Chinese EV manufacturing entering the U.S. market via Mexico.

  • 8-4. BYD [Company]

  • BYD is a Chinese electric vehicle manufacturer that has become a significant player in Mexico's automotive market. Their expansion plans and investment in Mexico are important in the context of trade dynamics and industrial influence.

9. Source Documents