Statement from Risaburo Nezu, Chairman of the OECD Steel Committee

The Committee:

  • called for immediate action to address the excess capacity challenge and its effects in the steel sector;

  • in cooperation with all actors concerned, members expressed their intention to organise a High-Level meeting on how best to address that challenge and mitigate these effects in the first half of 2016; 

  • exchanged views on past experiences with restructuring in the steel industry and their relevance for the current steel crisis;

  • exchanged views on the sluggish growth of the global steel market, the weak financial health of steelmaking companies, and expressed concerns about the economic and social implications of a further deterioration of the outlook; 

  • discussed new information on public support measures for new steelmaking capacity and agreed to continue examining government interventions;

  • expressed concerns about mounting frictions in steel trade;

  • discussed the importance of innovation for the long-term performance of the steel industry, and agreed to examine policy settings which encourage more efficient allocation of resources in the sector; and 

  • released a document on environmental innovations in steel and highlighted the importance of continuing to pursue innovation to help mitigate climate change by reducing greenhouse gas emissions.

Adjustment pressures are likely to grow significantly in the short to medium term

The world economic outlook has weakened in recent months. Emerging market economies have experienced further slowdowns in growth, which is weighing on global industrial production and trade. In the advanced economies, investment and productivity growth are subdued. According to the OECD’s latest Economic Outlook of 9 November 2015, world GDP growth is projected to remain modest in the coming years, despite a gradual improvement from 2.9% in 2015 to 3.3% in 2016 and 3.6% in 2017, revised down from the June 2015 forecasts.

Steel consumption developments have been negative for some major steel-consuming economies during the course of 2015. In October, the World Steel Association lowered its forecasts for world steel demand in 2015 and 2016. Global apparent finished steel use is now projected to decline by 1.7% in 2015, before increasing modestly by 0.7% in 2016. The downward revisions reflect a steeper demand contraction in China than was previously anticipated and a significantly weaker outlook for the CIS economies, South America and many developed countries this year. Not all economies are slumping, however, with Africa, India, the Middle East and Southeast Asia expected to register solid growth in demand.

Following growth of 1.2% in 2014, in the first 10 months of 2015 world crude steel production contracted by 2.5% in year-on-year terms. The production decline has been broad-based, affecting almost all regions of the world, and most market segments. In many economies, local producers are adjusting output in response to heightened import competition. Despite significant production and demand declines this year, world steel exports have increased by more than 4% in January-July 2015 relative to their level a year earlier. The combined effect of growing supply, weakening global steel demand, growing imports in many economies, and decreases in steelmaking costs has led to a very sharp decline in steel prices this year. 

Despite weak market conditions, steelmaking capacity is projected to grow further in 2015 2017. Capacity in the OECD area is expected to remain roughly unchanged. Much of the world’s capacity growth is likely to occur in developing Asia and in regions that are currently net importers of steel, though some investment projects may be cancelled or postponed given the weak market situation. Overall, world capacity is expected to increase to 2 418 million tonnes in 2017.

Demand weakness coupled with further increases in steelmaking capacity over the next few years – in an environment of already low steel prices, unsustainably weak profitability, and mounting debt – suggests that adjustment pressures are likely to grow significantly in the short to medium term. With the global business cycle expected to remain subdued over the next few years, resolving the structural factors that are inhibiting the industry from reaching its full potential will remain a key priority going forward.

In this context, members expressed the need to take immediate action to organise, in close consultation with all countries concerned - a High-Level session of the Steel Committee in the first half of 2016 on the challenges facing the sector. The proposed objective of the meeting would be to have vice-Ministers and senior government officials, endorse a statement addressing policy measures that have the effect of generating and preserving excess capacity and that may impede structural adjustment in the sectors and to provide guidance for further work of the OECD Steel Committee in this area. The Committee stressed the importance of having useful and constructive discussions on this important issue amongst all the actors concerned.

Government policies are contributing to excess steelmaking capacity

In recognition of the urgent need to address excess capacity and related challenges, the Steel Committee has deepened its discussions on public support to investments in steelmaking capacity. Additional focus was given to the role of public financial institutions including development banks, export-import agencies and trade credit insurance agencies in facilitating capacity expansion projects in the steel sector.

The Committee also discussed fiscal and non-fiscal incentives for new investments in the domestic steel industry. Fiscal policies such as concessionary corporate income tax rates, tax holidays, investment allowances, import duty exemptions, accelerated depreciation allowances, carry forward of tax losses, or tax credits are commonly adopted by some governments to attract domestic or foreign investments into domestic steel sectors. Given substantial supply-demand imbalances in the steel sector, newly installed steel capacities could face serious short- to medium-term financial sustainability risks. The Steel Committee agreed to continue to examine government support for new investments in steel industry and drawing the attention of governments and government-related institutions to the influence they may have on the excess supply situation.

Trade measures are escalating amid structural imbalances

Developments since the last meeting of the Steel Committee point to growing trade tensions in the steel sector, resulting in governments increasingly resorting to trade policy actions in response to the crisis facing the global steel industry. With the viability of parts of the industry at risk, the use of existing trade policy instruments is seen as an effective and immediate response to alleviate the harmful impacts of global excess capacity. While allegations of dumped or subsidised steel exports are on the rise, the large number of safeguard cases and import duty increases seen recently indicate a growing willingness to introduce measures which restrict imports of steel. A variety of non-tariff measures, such as new localisation requirements, trade finance measures and non-export-related government support measures continue to be implemented.

While trade actions and government support measures may provide short-term relief, they do not remove the sources of friction that ultimately lead to recurring crises in the global steel industry. The Committee stressed that long-term and comprehensive solutions derived from market driven policies and open market principles would be more effective as a means to minimise trade conflicts in the steel sector.

Past experiences can provide useful insights for addressing imbalances in the steel industry

The Steel Committee exchanged views on past experiences with restructuring of the steel industry. In this context, the Committee discussed industry and government-led strategies followed in different economies in the past and the impacts they had on the industry. While never painless, and recognising that each situation presents different circumstances, past episodes of industry restructuring have resulted in more efficient and economically viable steel industries. The Committee noted that, as part of an industrial upgrading process, restructuring should be facilitated in some economies in order to allow resources to be reallocated to the most efficient firms. Industrial upgrading requires a focus on quality rather than quantity, redirecting investments away from capacity and into new and innovative products and processes, as well as labour force training.

The steel industry has been making important efforts to innovate, but challenges remain

The amount of financial resources that are available to the steel industry are scarce and need to be used efficiently. In the recent past, some steelmaking companies have been using their available financing to invest in capacity and quantity, with less emphasis on investment in new innovative and higher quality products. It is important to quickly shift from quantity to quality-focused investments. Investment in R&D can lead to long-term gains in terms of productivity, environmental performance, and ultimately long-term performance can be very high. Productivity levels vary widely amongst steel companies, suggesting some room for resource reallocation. 

Technological progress can help improve the environmental performance of the steel industry

The steel industry is an important CO2 emitter, although significant efforts have been made to innovate and to improve environmental performance in the industry. The Committee noted that technological change is essential to address environmental challenges and policy has an important role to play. In the long run, reducing the industry’s emissions consistent with a low-carbon economy will require breakthrough technologies. In the meantime, the industrial application of already existing technologies could help mitigate greenhouse gas emissions.

Based on these discussions and in view of the COP21 discussions currently taking place in Paris, the Committee agreed to release a document that overviews environmental innovations that relate to steel. This document shows that the "direction" of innovation in steel related technologies has been moving towards emission reduction and increased efficiency since the late 1980s. However, a recent decrease in patenting low-carbon technologies in steel could be of concern given the environmental challenges ahead.