how will trade law developments in 2007 affect steel exports from china

How Will Trade Law Developments

in 2007 Affect Steel Exports from China

How Will Trade Law Developments

in 2007 Affect Steel Exports from China

William H. Barringer

Vinson & Elkins

April 17, 2007

William H. Barringer

Vinson & Elkins

April 17, 2007

2

Factors Affecting Likelihood of Steel Trade Remedy Cases Against ChinaFactors Affecting Likelihood of Steel Trade Remedy Cases Against China

1. Continued high volume of exports of steel from China:• 2005 finished steel exports were 22 million metric tons;

• 2006 finished steel exports were 45 million metric tons;

• In roughly 4 years China has gone from being a net importer of steel to being among the largest net exporters;

• China’s steel exports to the U.S. doubled between 2005 and 2006, making it, after Canada, the second largest supplier to a market that is addicted to use of trade remedies to block imported steel;

3

Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d)Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d)

• Other countries with significant increases in imports of steel from China include the European Union, Canada, Mexico, and Japan;

• With the exception of Japan, all of these countries are frequent users of trade remedies against steel imports;

• Steel industries in all countries experiencing surges in imports of steel from China have publicly indicated concerns with these imports and intentions to use trade remedy laws to address these imports.

4


2. Effectiveness of Government of the PRC in implementing policies which would have the effect of restricting exports:

• Reduction of rebates on VAT upon export;• Elimination and closure of inefficient and outdated capacity of

between 50 and 100 million tons;• Consolidation of industry which would lead to additional discipline

in the market;• Focusing new investment on technology and efficient upgrades

rather than expansion of overall steel capacity;• Other proposed actions to limit exports.

5


3. Comparative PricingWhile many attribute the surge in steel exports from China to the fact that capacity has been growing faster than demand, this does not appear to be the primary force driving export increases. Rather, the primary force appears to be the most capitalist of motivations, namely the fact that prices in major export markets are significantly higher, and therefore more profitable, than the prices in China.

6

Coated Steel SheetCoated Steel Sheet

$560

$644 $648

$691$716

$631

$884 $888

$843$878

$787

$831$867

$794$772

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

1Q06 2Q06 3Q06 4Q06 1Q07

Flat Products / HDG / China domestic Shanghai (incl. 17% vat) $/t

Flat Products / HDG / N.Europe domestic Ex-Works $/t

Flat Products / HDG / N.America domestic FOB US Midwest mill $/tSource: SBB

7

Hot-Rolled SteelHot-Rolled Steel

$441

$511$493

$532$554

$501

$612$642 $643

$666

$610

$657

$728

$646

$602

$496

$539$560 $552

$567

$0

$100

$200

$300

$400

$500

$600

$700

$800

1Q06 2Q06 3Q06 4Q06 1Q07

Flat Products / HRC / China domestic Shanghai (incl. 17% vat) $/t

Flat Products / HRC / N.Europe domestic Ex-Works $/t

Flat Products / HRC / N.America domestic FOB US Midwest mill $/t

Flat Products / HRC / Japan domestic (Tokyo Steel Manufacturing) FOT $/tSource: SBB

8

Cold-Rolled SheetCold-Rolled Sheet

$584

$628

$554$585

$654

$609

$715

$763 $772$790

$709

$761

$820

$757

$691

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1Q06 2Q06 3Q06 4Q06 1Q07

Flat Products / CRC / China domestic Shanghai (incl. 17% vat) $/t

Flat Products / CRC / N.Europe domestic Ex-Works $/t

Flat Products / CRC / N.America domestic FOB US Midwest mill $/tSource: SBB

9

PlatePlate

$405

$453 $436$458

$513

$722

$922 $931 $946

$1,002

$860 $860$904 $897

$867

$0

$200

$400

$600

$800

$1,000

$1,200

1Q06 2Q06 3Q06 4Q06 1Q07

Flat Products / Plate / China domestic Shanghai (incl. 17% vat) $/t

Flat Products / Plate / Europe domestic Ex-Works $/t

Flat Products / Plate (A36) / N.America domestic FOB US Midwest mill $/tSource: SBB

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4. For Antidumping Measures, the ability to demonstrate that the Chinese product is being sold in the export market at less than normal value.

– Given the higher prices in most export markets, it will be difficult at present and until there is a broad drop in prices globally to demonstrate dumping by Chinese companies in conventional price-to-price terms;

– Given profits of major Chinese producers, it will be difficult at present to show sales below cost and to apply constructed value;

– Given access to relatively low input prices, even using a non-market methodology it will be difficult to demonstrate dumping at present.

– Failure of U.S. standard pipe industry to follow rejection of section 421 relief is evidence of the absence of dumping.

11

5. The necessity to demonstrate injury to the importing country industry to succeed in antidumping, countervailing duty, and sector specific safeguard investigations.

– With only a few exceptions, it is difficult for an importing industry to demonstrate injury from imports from China or imports from China cumulated with imports from other sources.

– For example, overall imports of cold rolled sheet and coil into the United States doubled between 2005 and 2006, but without any appreciable effect on prices, profits, capacity utilization, or production by the U.S. industry.

– The recent plate Sunset Review in the U.S. that resulted in a negative determination and revocation of the antidumping duty order is illustrative of the performance being enjoyed by the U.S. and other flat rolled producers.


12

9.7%

1.6%

-5.1%

2.2%5.5% 4.5% 4.0% 5.0%

-10.2%-9.4%

-13.7%

-7.0% -7.0%

22.0%25.4%25.5%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1H20

06

VRAs1993 Orders

1997 Orders

2000 Orders

201 Remedy

Ope

ratin

g P

rofit

/Net

Sal

es

Sources: (2000-2006) Prehearing Report at CTL-III-16, (1990-1992, 1997-1999) Prehearing Report at CTL-I-5, (1993) USTIC Pub. 3009 at III-2, (1994-1995) USITC Pub. 3076 at C-4, (1996) Pub.3273 at III-5

The Plate Example: Domestic Industry Profits Surged After RestructuringThe Plate Example: Domestic Industry Profits Surged After Restructuring

13

Total 2004 Cash Flow: $887,060

Depreciation, 2000-2004: $590,832

"Repayment" of Negative Cash

Flows, 2000-2003:

$270,545

CapEx 2004: $23,063

“Excess” Cash 2004:

$2,620

Source: Prehearing Report at III-16 and III-22* 2000 and 2001 CapEx data were treated as BPI in Prehearing Report

Thousa

nds

of

Dolla

rs

The Plate Example: Cash Flow in 2004 Alone Was Sufficient to Cover Depreciation from 2000-2004 and Recover Negative Cash Flows from 2000-2003

The Plate Example: Cash Flow in 2004 Alone Was Sufficient to Cover Depreciation from 2000-2004 and Recover Negative Cash Flows from 2000-2003

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

2004

14

Factors Affecting the Likelihood of Steel Trade Remedy Cases Against China (cont’d)Factors Affecting the Likelihood of Steel Trade Remedy Cases Against China (cont’d)

– AD (or CVD) requires that imports cause injury to U.S. industry – 45 million tons of imports in 2006 (record)

• But Condition of U.S. industry key:– Consolidation: 3 U.S. companies = 70% U.S. production (and

globalized)– EAF about 55% U.S. raw steel production– U.S. Steel + National Steel = $400 million in annual savings– $13.8 billion is subsidies (pensions $9.2 billion; healthcare $4.6 billion)– New labor agreements (Mittal USA $500 million in annual savings)– High prices (HRC $400/st higher than 4 years ago, 200% increase)– Operating margins 2004-2006, 10% to 18% (U.S. Steel and Nucor) – Exports = almost 10% U.S. production– U.S. flat-rolled producers = over half of flat-rolled imports (primarily slab)

15

Factors Affecting the Likelihood of Steel Trade Remedy Cases Against China (cont’d)Factors Affecting the Likelihood of Steel Trade Remedy Cases Against China (cont’d)

6. Changes in the legal environment.– U.S. Congress likely to add countervailing duties and sector specific

safeguards against Chinese imports as additional trade remedies, thereby avoiding the need to demonstrate dumping and adding an additional layer of potential import relief.

– If the U.S. Department of Commerce finds significant subsidies in a case against Chinese steel, it is likely that many other countries will follow the U.S. lead and use countervailing duties to discourage imports from China.

16

Evaluation: Will Chinese Steel Exports Continue Their Rapid Increase - UnlikelyEvaluation: Will Chinese Steel Exports Continue Their Rapid Increase - Unlikely

• Chinese Government appears to be more serious about implementing policies which discourage exports (i.e. limiting value added tax rebate) and address potential excess capacity (i.e. forcing the closure of inefficient facilities and channeling investment into upgrading rather than expansion of capacity).

• Industry organizations (e.g. CISA, CCCMC) are increasingly aware of the dangers of continuing rapid increases in exports and provide a mechanism to inform and educate producers about these dangers.

• Major steel producers appear to be moderating their export expectations and intentions.

17

Evaluation: Pricing Unlikely to Support Injury/Causation in the Short TermEvaluation: Pricing Unlikely to Support Injury/Causation in the Short Term

• Injury cases can seldom be successful if prices are stable and/or rising.

• While there were price declines at the end of 2004 into 2005 and again in late 2007, these declines were modest, were not sustained, and were quickly followed by a recovery, a pattern which seems likely to continue.

• There are some projections that prices may decline in the second half of 2007, which could create opportunities for trade remedy petitions, but normally at least 2 quarters of declining prices are necessary to make a credible case

18

Evaluation: PricingEvaluation: Pricing

• There are few signs of a weakening of the global economy which could lead to a sustained decline in steel prices.

19

Evaluation: There Is Little Evidence of Injury to Steel ProducersEvaluation: There Is Little Evidence of Injury to Steel Producers

• Steel producers enjoyed record or near record revenues and profits in 2006, with expectations for continuing strong performance in 2007.

• Notwithstanding record imports into the U.S., for example, virtually all indicia of performance were positive, as was the case in Europe and Japan.

• Consolidation of industries in the U.S., the EU, Japan, and globally has facilitated the ability of mills in these markets to adjust production to avoid any significant deterioration in their operations, even when markets appear to be weakening.

20

Evaluation: InjuryEvaluation: Injury

• Producers in industries that are less concentrated (e.g. standard pipe) and in secondary markets where the industry and/or market are less developed (e.g. Southeast Asia) are more vulnerable to imports from China and more likely to be able to demonstrate injury.

21

Wild CardsWild Cards

• Significant capacity expansion, actual or planned, in Brazil, India, China (without closures of inefficient capacity) and even the U.S. (Thyssen-Krupp) could upset the global supply-demand equilibrium and cause a deterioration in pricing globally, although this is not imminent.

• Countries with less discipline in application of trade remedies could apply trade remedies in violation of WTO obligations.

• Political pressure on authorities could lead to less stringent standards in application of trade remedy laws (e.g. U.S. steel safeguards).

22

PRC Exports of Steel 2005 and 2006, Metric TonsPRC Exports of Steel 2005 and 2006, Metric Tons

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

Tons

2005 2006

Total Exports

…

23

PRC Exports of Steel by Country, 2005 and 2006, Metric TonsPRC Exports of Steel by Country, 2005 and 2006, Metric Tons

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

Tons

Korea

EU(25)

United

Sta

tes

Vietna

m

Singap

ore

India

Taiwan

Canad

a

Thaila

nd

United

Ara

b Em

irate

s

Indo

nesia

Japa

n

Exports by Country

2005

2006

24

Absolute and Relative Changes in Export Volumes(Trading Partners in Top Ten for Both Years, 2006 over 2005)

Absolute and Relative Changes in Export Volumes(Trading Partners in Top Ten for Both Years, 2006 over 2005)

Absolute Difference Difference as % of 2005

Total Exports 22,484,387 110%

Korea 3,290,020 60%

EU(25) 6,019,483 443%

United States 3,024,507 127%

Vietnam 854,137 98%

Singapore 787,294 100%

Taiwan 461,992 54%

Canada 418,029 71%

Thailand 118,492 15%

25

PRC Exports of Steel by Product Type, 2005 and 2006, Metric TonsPRC Exports of Steel by Product Type, 2005 and 2006, Metric Tons

- 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000 10,000,000

6. Other Steel Products

5. Rails

4.3 Cast Iron Pipe

4.2 Welded Pipe

4.1 Seamless Pipe

3.9 Plain Narrow Strip

3.8 Alloy Plates (Strips)

3.7 Stainless Steel Plates (Strips)

3.6 Electrical Steel (Strips)

3.5 Coated Plates (Strips)

3.4 Galvanized Plates (Strips)

3.3 Plain Cold Rolled Sheet Steel (Rolls)

3.2 Plain Hot Rolled Sheet Steel (Rolls)

3.1 Medium, Thick, and Extra Thick Plain Plates

2.3 Alloy Bars

2.2 Stainless Steel Bars

2.1 Plain Angle Bars

1.4 Alloyed Wire Rod

1.3 Stainless Steel Wire Rod

1.2 Other Plain Wire Rod

1.1 Plain Wire Rod

2005 2006

26

PRC Exports by Product Type, Absolute and Relative Differences, 2005 over 2006PRC Exports by Product Type, Absolute and Relative Differences, 2005 over 2006

CommodityAbsolute Difference

(Metric Tons)Difference as % of 2005

1.1 Plain Wire Rod 2,224,619 72%

1.2 Other Plain Wire Rod 2,468,195 114%

1.3 Stainless Steel Wire Rod 6,189 19%

1.4 Alloyed Wire Rod 275,677 35%

2.1 Plain Angle Bars 1,793,402 214%

2.2 Stainless Steel Bars 14,704 97%

2.3 Alloy Bars 4,029 27%

3.1 Medium, Thick, and Extra Thick Plain Plates 5,275,350 133%

3.2 Plain Hot Rolled Sheet Steel (Rolls) 1,795,171 114%

3.3 Plain Cold Rolled Sheet Steel (Rolls) 1,020,791 185%

3.4 Galvanized Plates (Strips) 2,286,314 251%

3.5 Coated Plates (Strips) 416,948 456%

3.6 Electrical Steel (Strips) 126,224 124%

3.7 Stainless Steel Plates (Strips) 383,269 156%

3.8 Alloy Plates (Strips) 45,061 68%

3.9 Plain Narrow Strip 571,926 60%

4.1 Seamless Pipe 1,112,791 80%

4.2 Welded Pipe 1,718,700 104%

4.3 Cast Iron Pipe 68,630 15%

5. Rails 153,555 182%

6. Other Steel Products 722,840 48%

27

Trade Remedy Investigations Against China: What to Expect in 2007Trade Remedy Investigations Against China: What to Expect in 2007

• Whether or not trade remedy cases are filed against China in 2007 will depend on the ability of the industry in the importing country to demonstrate injury;

• Mexico, having filed on plate, obviously believes it can prevail on injury;

• U.S. and EU industries are hesitant because of the difficulty in demonstrating injury and, in the case of the EU, the fact the EU is importing mostly commodity grade products but producing higher grade products;

• Canada and Mexico are likely coordinating strategies with the U.S. through AISI;

28

What to Expect in 2007 (cont’d)What to Expect in 2007 (cont’d)

• Continued high level of exports to Korea will eventually attract trade remedy petitions, but given strong industry performance cases not imminent;

• India, a heavy user of antidumping measures, may be positioned to file cases;

• Vietnam’s industry has expressed concern about imports from China, but lack of experience with trade remedies may deter them from filing cases.

• What is certain is that U.S., EU, Canada, Mexico, and India will file cases whenever conditions permit them to demonstrate injury and will include both antidumping and countervailing duty cases.

29


• Most likely cases in the U.S. in 2007:– Standard pipe: Wheatland Tube, the largest producer is

struggling and laying off workers.– Wire rod: Continues to underperform the industry in the U.S.,

although cautious because of loss in early 2006.– Cold rolled sheet and coil: Although market is holding up well

despite increasing imports, any downturn will certainly attract antidumping and countervailing duty petitions.

– OCTG: Although market is extremely strong, Chinese prices are substantially below U.S. prices and will certainly attract antidumping and countervailing duty petitions if there is a market downtrun.

30


• Other Markets Where Antidumping and Countervailing Duties Are Frequently Used:– Wire rod– Plate– Hot rolled sheet and coil– Cold rolled sheet and coil– Galvanized sheet and coil s– Standard pipe

31


• Moderation in China’s steel export volume coupled with continued strong markets globally could avoid an explosion of antidumping and countervailing duty cases against China in 2007.

• Longer term, closure of inefficient facilities, balancing capacity growth with growth in demand, and consolidation of the Chinese industry will be essential to avoid major trade disputes between China and its trading partners.

how will trade law developments in 2007 affect steel exports from china

Documents

imports of steel

finished steel exports

affect steel exports

coated steel sheetsource

net importer of steel

steel importssteel industries

trade remedy laws

china contd2