Statement by Mr Ulf Zumkley, Chairman of the OECD Steel Committee
87th Session of the Steel Committee, 26-27 September 2019
At its 87th session on 26-27 September 2019, the OECD Steel Committee held in-depth discussions on challenges facing the global steel industry and policy approaches to encourage adjustment and ensure a level playing field in the sector. Key issues of discussion included global and regional steel market conditions and future outlook, steel trade policy developments, steelmaking capacity investments and trends in excess capacity, and policies to encourage restructuring and better market functioning in the steel industry. The Committee also discussed ways to enhance its ongoing work on mergers and acquisitions, barriers to exit and state enterprises in the steel sector, and agreed on the next steps of its subsidies work.
Delegates of the Steel Committee:
The expansion of the global economy continued to lose momentum during the first half of 2019. In its 19 September 2019 Economic Outlook, the OECD revised downwards its global economic growth forecasts to 2.9% in 2019 and 3% in 2020, the weakest annual growth rates since the financial crisis. Downside risks are continuing to mount, including trade policy tensions that are weakening confidence and business investment, persistent weakness in the manufacturing sector that is negatively affecting household incomes and spending, and significant financial market vulnerabilities arising from a high level of indebtedness coupled with a slower growth environment.
The first half of 2019 saw a marked decline in steel market conditions. Steel prices have been under downward pressure; steelmaking raw material prices, in upward trend; and, thereby, profit margins have deteriorated. After some improvements in 2016 and 2017, the average profitability and indebtedness of steel companies deteriorated again during 2018. Global crude steel production increased by 5.1% during the first half of 2019. Risks to the steel sector outlook are high, with an expected weakening of the global economy, increasing steel trade frictions, and structural imbalances that persist in the steel sector.
The latest available data show an increase in global steelmaking capacity in the first half of 2019, to an annualised level of 2 290.1 million metric tonnes (mmt). In the absence of additional capacity closures during the remainder of 2019, global capacity would increase this year for the first time since 2015. The gap between global capacity and production widened to about 440.0 mmt (annualised) in the first half of 2019.At the same time, many new investments contributing to excess capacity continue to take place in specific jurisdictions, and many others are in the planning stage. Should all these projects be realised, global steelmaking capacity could increase by 2-3% between 2020 and 2022, in the absence of closures.
In this context, and given that the risks mentioned above have persisted in the steel market, the Committee underscored that it would continue to work together to meet its objectives of supporting swift, concrete and effective actions worldwide to address excess capacity, its impact and its root causes. Furthermore, the Committee noted the progress made by the Global Forum on Steel Excess Capacity so far and expressed support for the continuation of the Forum’s work beyond 2019 and to implement the agreed policy actions to eliminate excess capacity and the market distorting support measures that contribute to it.
Steel trade continued to decline in 2018, with a contraction in global steel exports of 14.4 mmt (-5.2%). This trend continued in the first quarter of 2019, with world steel exports falling by 2.6 mmt relative to the first quarter of 2018. The Committee discussed recent developments in trade policy measures affecting steel trade. Trade-related measures applied to key steelmaking raw materials, which significantly distort the steel market, were also discussed. Delegates expressed serious concerns about these and other policy measures affecting trade in steel and steelmaking raw materials, with several Members underlining the chain effect created by certain measures. The Committee also discussed preliminary findings on the linkages between steelmaking capacity and trade, and noted the importance of avoiding market-distorting policies that contribute to growth in capacity and disruptions in steel trade flows.
State enterprises continue to play a significant role in the steel industry. The Committee discussed future work looking at state enterprises’ activity as cross-border investors, and the possible implications on markets including capacity developments. The Committee raised concerns about the increasing cross-border activity of state enterprises from some jurisdictions and highlighted the need for a level playing field. The Committee recognised the motives for cross-border investments of state enterprises may be complex, highlighting the need to study this issue in more detail. Some delegations noted challenges with the definitions of state enterprises.
Consolidation through mergers and acquisitions (M&As) can also be an important mechanism to facilitate structural change. The Committee discussed future work that would shed light on the evolving trends of M&As involving steel firms and explore the link between consolidation and steelmaking capacity, in particular in relevant jurisdictions.
Barriers to exit in the steel industry are significant and sustain excess capacity. The Committee discussed different barriers to exit, and called for the removal of subsidies and other government support measures that hinder the exit of inefficient steel firms. Delegates also noted the importance of addressing consequences of structural adjustment by applying effective social dialogue and assisting displaced steel workers. Future work in this area will lead to the development of policy recommendations by the Steel Committee to facilitate structural adjustment in the steel sector. Members agreed on the next steps of the subsidies work.