China Dumping Excess Steel China has created enormous over capacity. It is now selling its products below cost to the rest of the world

WASHINGTON – In a “normal” capitalistic country, when supply expansion strategies in any given industry exceed market demand, the companies operating in that sector pay the price. In order to realign demand and supply, they have to cut production, fire workers, sometimes close down entire production facilities. And, of course, the weakest players go bankrupt. Invested capital goes up in smoke, share holders are wiped out. This is painful. But it has to be done, simply because nobody can afford the luxury to keep making stuff that cannot be sold at a profit. And you cannot have any functioning capitalism without profits.

In China market rules do not apply

Well, move over to China and you see that these elementary rules do not apply –at least not now. Here is the story. In the go-go reckless years in which all local Chinese governments went into heavy debt in order to finance more and more construction projects, (construction was the easiest way to jack up GDP numbers), China built up gigantic steel, copper, cement, and glass capacity. All this was necessary, or so it seemed at the time, in order to supply the extraordinary construction boom.

Yes, except that the boom is over. China now is fantastically overbuilt. Brand new developments sit empty. There is too much of everything: luxury condos, shopping malls, office buildings.

Factories will not be closed

Needless to say, this is having and will have an impact on the supercharged sectors that were beefed up in order to support construction, steel first and foremost.

Well, according to the old-fashioned “demand and supply” capitalistic logic, China would have to cut down steel production. And we are not talking about trimming. We are talking about shutting down dozens of steel mills, since shrinking demand generated by a cooling economy will not even remotely match the existing, gigantic over-supply in the years to come. This would be most unpleasant. At a time of diminishing economic expectations, when projected growth rates are constantly adjusted down by the Beijing authorities, closing state-owned steel plants, while creating unemployment by firing thousands of workers would be politically complicated.

Political jobs

But, no worries. China operates in its own world –a world in which normal laws of the business cycle do not apply, for now. You see, in China most large steel mills are state-owned corporations. They will not go bankrupt on account of this over capacity and over production crisis because the state will give them easy credit, no matter what. It is politically important (forget about economics) that the mills stay open, and that they keep all their workers employed.

Dumping is the answer

And what about the excess steel they keep making for which there is no domestic market? Very simple! They will dump it abroad. In fact, they are already doing this.(Dumping means selling a product below cost, an illicit trade practice). As the WSJ reports, Chinese steel exports to the US have already jumped 40% in January 2015 from a year before, while US domestic prices have collapsed, creating a huge problem for US steel producers already hit by lower demand from the energy sector.

It is illegal

But wait. Isn’t dumping against the WTO rules? Isn’t Chinese behavior prohibited? Of course it is. But you have to make a case: provide the evidence, bring the whole thing to the WTO in Geneva, wait for a ruling, plan countermeasures, etc. All this takes time. Meanwhile, the Chinese keep dumping gigantic amounts of excess steel all over the world: Europe, the USA, India, and South Korea, bringing about economic ruin to hundreds of companies and thousands of workers.

How much excess capacity?

And how big is this excess capacity? Extremely big. As David Stockman put it in his Contra Corner: “China’s steel exports are now running at a 110 million ton annual rate compared to just 50 million in 2013. What’s worse, China has in excess of 1.1 billion tons of capacity and after nearly tripling production to satisfy its construction binge, its current 750 million tons of domestic demand has nowhere to go except down.” Got that? That’s 350 million tons of steel produced annually beyond what the Chinese market can absorb. All this will be dumped all over the world.

If private sector capitalism is bad, state-run corporations are worse

Capitalism is a crisis prone, wasteful and lousy system. We know that. But if you think that a country running huge state monopolies that are (at least for a while) immune from market forces is any better, just look at China.

I am confident that the oversold Chinese economic miracle will be soon deflated, along with its bubble economy. But, in the meantime, this anomaly that passes for “superior economic system” will be a source of disruption for the rest of a world economy that is trying to create and live by some rules of good conduct.

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