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China’s Steel overcapacity and trade tensions

NDRC (National Development and Reform Commission) published a document on Friday to stress the importance to cut overcapacity in steel industry, taking an action against rapid increasing steel prices in recent months. Despite that recent recovery in output and sales of steel companies, document still called for further action to reduce capacity to maintain a healthy economic growth. Total inventory of steel in 29 major cities had exceeded 12.39 million metric tons as Feb 10, which was a 35% increase compared with 3 weeks ago. This capacity also surpasses the peak of 2016.

China’s steel overcapacity has always been a concern for its western trading partners, in particular steel producing countries. China can play this overcapacity issue in two ways. One: It can use it as a proof that the average cost per ton is lower than the international market. Two: It can attempt to avoid any import tariffs from western parties, just on the basis that producing large quantities decreases the average prices. WTO rules say a country export prices need to be compared to those of international markets. If the country is found to price the goods at below the international market, then some measures will be applied. The fact that China produces half of the world’s steel makes China, almost by definition, the market itself. It is always very difficult for Western parties to try to impose tariffs on steel production, because China’s view has been “Le marché c’est moi”. Therefore there is no easy international comparison because China is the international market.

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