Japan’s Ministry of Economy, Trade and Industry (METI) released its “White Paper on International Economy and Trade 2016,” which analyzes topics including the potential impact of excess steel capacity in China on the global economy.
The graph above shows changes in China’s steel production capacity. Overall production capacity has more than tripled in the past decade due to increased investment in domestic construction following an upswing in building, bridge and railway construction projects.
Capacity exceeds demand
Despite the growth of production capacity, the growth in actual steel production—representing real demand—has been declining. This has caused the gap to widen and reveals the difficulties China faces in addressing excess steel capacity. Capacity utilization rates, which amounted to 80% to 90% in 2006, have fallen to about 70% in recent years.
Prices falling worldwide
China has now become the world’s leading steel producer, accounting for nearly 50% of total global steel production. However, when product supply capacity greatly exceeds demand, prices decline. In March 2016, China’s steel prices decreased by as much as 10.9% from the previous year. Low-priced steel exports from China have made a huge impact on steel industries worldwide. To address this situation, many countries are imposing anti-dumping duties on steel originating from China. Furthermore, China’s chemical sector is also experiencing similar issues of excess capacity.
Relieving trade disputes
To compensate for the deceleration of economic growth in advanced countries, investment in China was considered a strong driver of the global economy. However, the problem of excess capacity in China could have far-reaching adverse effects. At the G20 Trade Ministers Meeting in Shanghai in July 2016, all ministers including China confirmed their commitment to unite on efforts to address the problem of global excess capacity. The ministers aim to abolish subsidies and other means of support which may lead to excess investment.