By TIOL News Service

PARIS, DEC 06, 2015: IMMEDIATE action is needed to address the challenge of excess global steel capacity, according to industry and government officials at the OECD’s Steel Committee meeting in Paris on 30 November and 1 December 2015.

The world economic outlook has weakened in recent months. Emerging market economies have experienced further slowdowns in growth, which is weighing on global industrial production and trade. In the advanced economies, investment and productivity growth are subdued. According to the OECD’s latest Economic Outlook of 9 November 2015, world GDP growth is projected to remain modest in the coming years, despite a gradual improvement from 2.9% in 2015 to 3.3% in 2016 and 3.6% in 2017, revised down from the June 2015 forecasts.

Steel consumption developments have been negative for some major steel-consuming economies during the course of 2015. In October, the World Steel Association lowered its forecasts for world steel demand in 2015 and 2016. Global apparent finished steel use is now projected to decline by 1.7% in 2015, before increasing modestly by 0.7% in 2016. The downward revisions reflect a steeper demand contraction in China than was previously anticipated and a significantly weaker outlook for the CIS economies, South America and many developed countries this year. Not all economies are slumping, however, with Africa, India, the Middle East and Southeast Asia expected to register solid growth in demand.

Following growth of 1.2% in 2014, in the first 10 months of 2015 world crude steel production contracted by 2.5% in year-on-year terms. The production decline has been broad-based, affecting almost all regions of the world, and most market segments. In many economies, local producers are adjusting output in response to heightened import competition. Despite significant production and demand declines this year, world steel exports have increased by more than 4% in January-July 2015 relative to their level a year earlier. The combined effect of growing supply, weakening global steel demand, growing imports in many economies, and decreases in steelmaking costs has led to a very sharp decline in steel prices this year.

Despite weak market conditions, steelmaking capacity is projected to grow further in 2015‑2017. Capacity in the OECD area is expected to remain roughly unchanged. Much of the world’s capacity growth is likely to occur in developing Asia and in regions that are currently net importers of steel, though some investment projects may be cancelled or postponed given the weak market situation. Overall, world capacity is expected to increase to 2 418 million tonnes in 2017.

Demand weakness coupled with further increases in steelmaking capacity over the next few years – in an environment of already low steel prices, unsustainably weak profitability, and mounting debt – suggests that adjustment pressures are likely to grow significantly in the short to medium term. With the global business cycle expected to remain subdued over the next few years, resolving the structural factors that are inhibiting the industry from reaching its full potential will remain a key priority going forward.

In this context, members expressed the need to take immediate action to organise, in close consultation with all countries concerned - a High-Level session of the Steel Committee in the first half of 2016 on the challenges facing the sector. The proposed objective of the meeting would be to have vice-Ministers and senior government officials, endorse a statement addressing policy measures that have the effect of generating and preserving excess capacity and that may impede structural adjustment in the sectors and to provide guidance for further work of the OECD Steel Committee in this area. The Committee stressed the importance of having useful and constructive discussions on this important issue amongst all the actors concerned.
Government policies are contributing to excess steelmaking capacity

In recognition of the urgent need to address excess capacity and related challenges, the Steel Committee has deepened its discussions on public support to investments in steelmaking capacity. Additional focus was given to the role of public financial institutions including development banks, export-import agencies and trade credit insurance agencies in facilitating capacity expansion projects in the steel sector.

The Committee also discussed fiscal and non-fiscal incentives for new investments in the domestic steel industry. Fiscal policies such as concessionary corporate income tax rates, tax holidays, investment allowances, import duty exemptions, accelerated depreciation allowances, carry forward of tax losses, or tax credits are commonly adopted by some governments to attract domestic or foreign investments into domestic steel sectors. Given substantial supply-demand imbalances in the steel sector, newly installed steel capacities could face serious short- to medium-term financial sustainability risks. The Steel Committee agreed to continue to examine government support for new investments in steel industry and drawing the attention of governments and government-related institutions to the influence they may have on the excess supply situation.

Developments since the last meeting of the Steel Committee point to growing trade tensions in the steel sector, resulting in governments increasingly resorting to trade policy actions in response to the crisis facing the global steel industry. With the viability of parts of the industry at risk, the use of existing trade policy instruments is seen as an effective and immediate response to alleviate the harmful impacts of global excess capacity. While allegations of dumped or subsidised steel exports are on the rise, the large number of safeguard cases and import duty increases seen recently indicate a growing willingness to introduce measures which restrict imports of steel. A variety of non-tariff measures, such as new localisation requirements, trade finance measures and non-export-related government support measures continue to be implemented.

While trade actions and government support measures may provide short-term relief, they do not remove the sources of friction that ultimately lead to recurring crises in the global steel industry. The Committee stressed that long-term and comprehensive solutions derived from market driven policies and open market principles would be more effective as a means to minimise trade conflicts in the steel sector.