October 19, 2010    Volume 17, No. 16

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U.S. Steel Industry Says Get Ready, Chinese Government Companies Are Coming To America

By Richard McCormack

China's government-owned steel industry has reached a new level of domination, accounting for 46 percent of global steel production. It is now entering a new phase of global expansion.

China intends to expand steel production throughout the world through a program called "Going Abroad," putting further pressure on companies that operate in the free-market without government subsidies, according to the American Iron and Steel Institute and the Steel Manufacturers Association.

"The next step in China's government-directed industrial strategy is expansion abroad -- a strategy which the government is now implementing," according to an analysis done for the two trade associations by Wiley Rein LLP in Washington, D.C. The "Going Abroad" strategy directs China's largest state-owned enterprises "to invest abroad and establish 'greenfield' operations," says the study. "In essence, after creating, developing and nurturing massive 'national champions,' the Chinese government is now strategically deploying these entities overseas to execute the government's agenda: to acquire natural resources and raw materials, obtain technology and expertise, gain entry into new markets and increase China's economic and political influence on a global scale."

China increased steel production by 346 percent between 2000 and 2009. Total steel production could hit 630 million metric tons this year, up from 127 million metric tons in 2000. In 2009, U.S. production declined to only 58 million tons.

China's steel production growth "continues to defy market forces," says the Wiley Rein study entitled, "The Reform Myth: How China is Using State Power to Create the World's Dominant Steel Industry." "This unparalleled expansion has been facilitated by massive government intervention. For years, the Chinese government has owned, directed and subsidized virtually every aspect of the Chinese steel industry."

Such ownership is deemed illegal under the World Trade Organization rules. Yet China has defied them. The Chinese government owns most of the shares of the major steel producers. It is involved in making the business decisions within virtually all of China's major steel companies. "As a result, more than ever before, China's steel producers are operating in an environment where basic market forces do not exist or apply and where commercial decisions are mandated by the government, a clear violation of China's WTO commitment to 'not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises.' Despite its commitments regarding market reforms, government intervention in the steel industry has grown steadily since China's accession to the WTO in 2001. Indeed, the Chinese government has shown no signs of relinquishing control over the steel industry, as China's largest steel-producing state-owned enterprises are now being deployed overseas to further the government's political objectives."

The Chinese government continues to provide its steel companies with financial subsidies, cash grants, land grants, conversions of debt to equity, debt forgiveness, preferential loans and tax incentives. In the area of materials subsidies, Chinese prices for coke in December 2008 were $241 per metric ton lower than export prices. "Production of one ton of steel requires approximately 0.6 tons of coke," says the study. "This means that Chinese steel producers enjoyed a cost advantage of nearly $145 per metric ton over their international competitors." This advantage flows not only to Chinese producers, but to Chinese manufacturers that use steel in their products -- another "unfair advantage," says Wiley Rein.

China's decision to accelerate its "Going Abroad" strategy will make it even more difficult for U.S. producers to compete against the "Chinese government's intervention in private markets," says the study. "Chinese investment in the 'Going Abroad' strategy will force private U.S. steel companies to compete directly against government-owned and supported companies in the U.S. marketplace, creating significant imbalances that will further distort the steel market."

The Chinese government has directed its Anshan Iron and Steel Group to directly invest in the United States. On May 17, 2010, the company announced a joint venture with Steel Development Co. of Amory, Miss., to build up to five new steel plants in the United States. "Anshan's investment in SDC is the direct result of China's industrial policies," notes Wiley Rein. The 100-percent state-owned enterprise became China's fourth largest steel producer "through government mandated mergers and the receipt of massive government subsidies."

China's 2009 "Revitalization Plan," "explicitly identifies Anshan as a recipient of extensive government support in order to strengthen its international competitiveness and to assist Anshan in acquiring strategic resources and establishing operations abroad. . . Anshan is now investing in the U.S. steel market, with the full force and encouragement of the Chinese government."

China is stepping up its global strategy. China's government said it invested $43.3 billion overseas in 2009. Through June 2010, overseas investment had reached $55.2 billion. The OECD says these figures are "substantially" underestimated. Chinese foreign mergers and acquisitions have increased by more than 50 percent in the first half of 2010, according to report from China Daily Online. "Chinese investment into the United States jumped 360 percent in the first half of 2010 compared to the same period last year," according to the Wiley Rein report. "In 2009, Chinese enterprises announced new direct investment in the United States of approximately $5 billion, up from $500 million in 2008, and despite a significant global downturn in such investments. Moreover, Chinese firms acquired or announced that they were starting more than 50 U.S. companies in 2009."

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