The Latin American steel industry began the 21st century with the hope of becoming the engine of economic growth in the region, but, far from achieving this, it suffered a long stagnation that today is already a crisis, and the main culprit is China, they warn in the sector.
One of the objectives that countries such as Brazil, Mexico, Argentina, Chile, Colombia, Ecuador and Peru set for themselves in 2000 was to develop their manufacturing sector, to stop basing their economies on the export of raw materials.
The main reason is that, since it does not have added value, trade in commodities produces lower-skilled, lower-wage jobs than manufacturing.
The key to accelerating industrialization was steel productionsince this alloy of iron and carbon is used to manufacture almost everything, from buildings and bridges to vehicles and from household appliances to electronic and technological products.
At the beginning of the century the region manufactured 6.6% of the world’s steelaccording to the World Steel Association (WSA), and exported more than 160 thousand tons of the material to China (twice as much as they mattered of that country).
But the steel sector never took off.
On the contrary, in this almost quarter of a century Latin American steel was losing relevance.
Production stagnated: while in 2000 the region produced 56 million tons of steel – a figure that increased to 67.6 million in 2011 – from then on everything went down, and last year it produced 58.3 million.
Meanwhile, its weight on the world scale was systematically falling. In 2023, it reached its lowest point, representing just 3.1% of the world stock, less than half that at the beginning of the century.
According to sector experts, the crisis is worsening, putting at risk those close to 1.4 million jobs that the industry generates.
And the great culprit of everything – they say – is China.
Steel “Flood”
This is warned by the Latin American Steel Association (Alacero), based in Sao Paulo, Brazil, which has accused Beijing of “flood” the region with its cheap steel.
The organization reported that several steel companies had to paralyze its operations in recent months.
The most recent was Huachipatothe main steel producer in Chile, which on March 20 announced the indefinite closure of its plant.
The executive director of Alacero, Alexander Wagner, He told BBC Mundo that although there are endogenous factors that hindered the development of the industry, the big problem was generated by the Asian giant.
“Between 2000 and 2023, China increased its steel production by almost 700%“.
“It went from producing 15% of the world’s steel to producing 54%“he said, citing WSA figures.
Beijing not only makes more steel than all other countries combined. Besides, exports it at a price below the marketmaking it impossible for other producers to compete, denounces the Alacero manager.
“Dumping”
Few regions are suffering from this problem – which in the commercial world is known as “dumping” – more than Latin America.
To understand the dimension, it is enough to see how the dynamics between the region and Asia’s largest country changed in the last quarter of a century.
As we said, in 2000, Latin America exported about 160 thousand tons of steel to China, and, in turn, imported half of that: about 80 thousand tons of Chinese steel.
But in the following decades the situation was dramatically reversed.
While exports to China fell 94% by 2023, Chinese steel imports increased by 8,690%.
(Meanwhile, the sale of Latin American raw materials to China increased almost 1,500%, adds Warner, who warns of a “re-priming” process.)
Today some 10 million tons of Chinese steel that are causing “a deindustrialization process in the region” and leading the sector to a crisis, says the steel leader.
The most recent victim is the Huachipato Steel Company, from Chile, located in Talcahuano, Bío Bío region.
The company, which in the first half of 2023 reported losses of US$279 million, made the decision to paralyze its operations indefinitely after consider “insufficient” the decision of the country’s authorities to impose a 15.3% tax on imports of Chinese steel balls.
According to the directors of Huachipato, a company that generates nearly 20,000 direct and indirect jobs, that measure is not enough to solve the distortions that Chinese steel is producing, which, according to their calculations, is a 40% cheaper than the Chilean one.
Also the Gerdau Steel Company, of Brazil, announced a few weeks ago that it would suspend some of its workers at the São José dos Campos plant for five months, starting in April, alleging a “strong competition from China“.
According to Alacero, this is in addition to other temporary suspensions that other Brazilian companies announced in the last six months, when “the level of imports began to be serious.”
“The objective of the suspensions is to avoid definitive closure, to try to save jobs. We want to prevent this from also happening in countries like Argentina and Colombia,” said Wagner.
cheap steel
But how is it possible that bringing steel from China to Latin America, on the other side of the planet, is more profitable than producing it locally?
Or put another way: Why is Chinese steel so much cheaper? than the Latin American?
The main reason is that Chinese steel is subsidized by the state and, furthermore, it produces in excess.
According to Cory Combs, an expert analyst on Chinese Energy and Industry and associate director of the Trivium China think tank, Beijing placed steel production as a central element of the country’s economic growth, after going from being an agrarian economy to an industrial one.
More than 2,000 factories were created (although today the bulk of production is concentrated in seven companies, led by Baosteel, a subsidiary of the state-owned Baowu) and the steel industry created more 3 million jobs.
Subsidized steel was used to build megacities for people moving from the countryside to urban centers.
“The industrial sector became a key piece of the economy, and today represents close to 32% of China’s Gross Domestic Product“explained the expert to BBC Mundo.
Motorized and financed by the State, Chinese steel companies went from producing 128.5 million tons in 2000 to 1,014.6 million in 2023according to the WSA.
But the sector became such a key player in the Chinese economy that, even when domestic demand began to slow, factories continued producing subsidized steel.
“The famous ghost towns and rampant construction projects are visible,” says Combs, of the huge empty housing estates in various parts of the country.
“It was an entire exercise to boost GDP,” points out.
Subsidized exports
The Chinese government not only subsidized production, it also subsidized export of steel, which began the “wave” of cheap Chinese steel that spread throughout the world.
A wave that has grown larger in recent times due to the reduction in domestic demand for steel generated by the crisis in the Chinese real estate sector, says Combs.
According to Wagner, although Beijing claims to no longer be subsidizing steel exports, “they have so much scale and so much surplus that all the steel they have left over is sold almost at marginal cost.”
But why does China continue to produce more steel than it needs or can sell at a good price? And why do you maintain subsidies for a product that you manufacture in excess?
Combs points out that the main explanation is that the country “does not want to lose GDP“.
“There are times when the Chinese government takes very aggressive measures to enter certain markets, but This is not the case with steel in Latin America,” says Combs.
The problem, he says, is domestic, and “generates a lot of frustration” in China.
“Although many Chinese steel companies operate with very low margins (in 2023 they reported profits of 1.33%) and fifteen of the main producers even They asked the government to impose production cutsnone of them feel that they can take the first step individually,” explains the expert.
“And local governments, on which these companies depend, also do not want to be the first to impose cuts. “They want to keep their piece of the pie.”
Meanwhile, the central government, which has the power to decide, “has been slow to react because is very dependent on industrial production”, says.
“The government of Xi Jinping aims to reduce his dependence on the sector and it is actively trying to develop its technological industry, electronic vehicles and clean energy sources, but the problem is that the transition process is very slow.”
Why does it affect Latin America so much?
The 10 million tons of Chinese steel that Latin America imported in 2023 represents an enormity for a region that produced nearly 58 million tons (it’s a little more than 17%, to be more exact).
However, Latin America was just one of the destinations to which more than 90 million tons of steel that China exported last year.
Why then does it seem to be the region most affected by the entry of this cheap steel?
The explanation, experts agree, is that Latin American countries are in inferior conditions when defending against Chinese dumping.
Other steel-producing nations, such as India, the United States, and the European Union countries they have imposed tariffs (the last two, close to 25%) to combat the low prices of the Chinese product.
But in Latin America only Mexico has taken a measurement of the same magnitude.
It is the only country in the region – Wagner points out – where the manufacturing industry did not decline, largely thanks to its proximity to the United States.
On the other hand, South American countries They depend much more on China for the rest of your business, a reality that “limits their ability to impose tariffs”since Beijing could retaliate and do the same with some of the products it imports from Latin America.
This would be the main reason why Brazil, the main steel producer in the region, which, by the way, sells to China the iron ore it needs as a raw material to create steel, imposes rates of only 10-12%, and Chile proposes a tariff close to 15%, which continues to leave the price of Chinese steel below the local one.
Another fear of Latin American countries is that organizations such as the World Trade Organization (WTO) impose fines for tariffing Chinese imports.
And, far from balancing this trade imbalance, the WTO has often decided in favor of China in many of the dozens of “dumping” complaints it received against the Asian giant, which joined the organization in 2001.
Combs explains that it is not about favoritism, but about a rather technical topic (which is being resolved): China is still considered an “emerging economy”, so the same restrictions are not imposed on it as a “market economy”, and this includes anti-dumping measures.
Beijing’s reaction
The famously secretive Chinese government has not made official statements about the plans of Latin American countries to tariff their steel, says the expert.
However, after Mexico’s announcement to impose a 25% rate, in August 2023, one of the media that operates under the orbit of the powerful Chinese Ministry of Commerce (Mofcom), the China Trade Remedies Information, warned that “the Chinese companies that use Mexico as an export market and investment transfer destination will be greatly affected”.
Meanwhile, in another article published last March on the website of the Economic and Commercial Section of the Embassy of the Republic of Chile, Mofcom criticized the so-called Chilean Anti-Distortion Commission, which determines the issue of tariffs on imports.
“The majority of committee members artificially determine the dumping margin without basing it on objective facts, politicizing what should be a technical process”, criticized the note.
He also warned that “this has seriously violated the Free Trade Agreement signed by Chile and cannot make other trading partners respect the same treaty.”
green steel
While Latin American governments analyze the pros and cons of imposing tariffs – a measure strongly demanded by Alacero – the resolution of this trade conflict could be determined by an external factor, but one that is becoming more and more relevant: environment.
In 2020, Xi announced during the United Nations General Assembly that China – the world’s most polluting country – will try to reach peak carbon dioxide emissions before 2030 and will seek neutrality of CO2 by 2060.
According to Combs, to meet this goal, Beijing plans cut about 8% of its steel production by 2030.
“Chinese steel is produced from coal and that industry is the most polluting in the countrycontributing 15% of carbon emissions,” he points out.
China also aims to produce 20% of its steel using renewable electricity by 2030.
Wagner also believes that the environment will be a key factor in ending the imbalance caused by Chinese steel, but for a different reason.
“The great advantage that Latin American steel has is that It’s much cleaner. than the Chinese,” he points out.
Producing each ton of Chinese steel emits 45% more CO2according to Alacero data.
But to that we must add the pollution generated when transporting it to the other side of the planet, which, according to the organization, is three times more than what is emitted when manufacturing it.
As the world moves more towards carbon neutrality, That advantage will be felt, says Wagner.
The leader is also convinced that the transition towards a cleaner world could allow the Latin American steel industry finally take off, reversing the current process of “reprimarization” of the economy.
“I am optimistic. Steel is closely linked to energy: everything that is renewable energy needs steel too. So there is a great opportunity for steel, and especially clean energy, to be a focus of production and export in Latin America,” he points out.
Currently the industry operates at 60% of its installed capacity, which leaves a growth potential of 40%, he is excited.
“This could stop the deindustrialization process that we have suffered in the last 20 years, which has left us without quality jobs, generating poverty and inequality like in few places in the world.”
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