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How Will Trade Law Developments in 2007 Affect Steel Exports from China. William H. Barringer Vinson & Elkins April 17, 2007. Factors Affecting Likelihood of Steel Trade Remedy Cases Against China. Continued high volume of exports of steel from China: - PowerPoint PPT Presentation
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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
Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d)Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d)
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• Reduction of rebates on VAT upon export;• Elimination and closure of inefficient and outdated capacity of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
Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d)Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d)
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
10
Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d)Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d)
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.
Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d)Factors Affecting Likelihood of Steel Trade Remedy Cases Against China (cont’d)
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
What to Expect in 2007 (cont’d)What to Expect in 2007 (cont’d)
• 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
What to Expect in 2007 (cont’d)What to Expect in 2007 (cont’d)
• 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
What to Expect in 2007 (cont’d)What to Expect in 2007 (cont’d)
• 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.