Subsidies to steel-producing firms are controversial as there is evidence that some subsidies exacerbate crude steelmaking excess capacity by incentivising steel firms to expand their capacity or retain it during times of crisis, and thus distort the level playing field leading to trade frictions. Through cash grants, below-market borrowings (BMB) and corporate income tax concessions, a typical Chinese steel firm receives 5 times more subsidies, as a share of its revenues, than a steel firm located in another partner economy, and 10 times more than a steel firm located in an OECD Member country. In partner economies, and especially the People’s Republic of China (hereafter “China”), subsidies are channeled primarily towards firms that are state-owned enterprises (SOEs), or larger in size firms (as per their total asset size), or are more heavily indebted. In partner economies, any additional USD 1 million in cash grants, sustained over a number of years,1 correlates with a 5 000 to 15 000 metric tonnes increase in steel production capacity.
This report analyses the differences in subsidy allocation to steel firms and their impact on crude steelmaking capacity using visual exploration and multivariate regressions based on the data collected in the OECD MAnufacturing Groups and Industrial Corporations (MAGIC) database. This new confidential database comprises extensive and comparable financial data, as well as BMB estimates, for a sample of 47 steel firms covering 36% and 62% of steelmaking capacity in OECD Member countries and in partner economies respectively, as of 2022, and from the year 2005 to 2022. The findings highlight the considerable challenges that the provision of subsidies to steel firms, especially in partner economies, can represent for the pursuit of a fairer and more competitive steel market:
Subsidisation practices differ widely across time, jurisdictions, and firms. For example:
Steel firms that are more than 25% government-owned receive twice as much in grants and corporate income tax concessions as firms that are less than 10% government-owned, and 3 times more BMB.
China relied extensively on BMB as a countercyclical instrument in each of the two steel crises covered in our data (the 2009 and 2015 steel crises), contrary to OECD Member countries and other partner economies, which used BMB to a much lesser extent. Countercyclical use of BMB probably impedes necessary capacity reductions and delays market-driven restructuring.
Addressing implicit government guarantees is crucial, as they may lead even private banks to offer loans at below-market conditions to steel firms by artificially boosting their credit ratings.
Steel subsidies are provided through cash grants, BMB and corporate income tax concessions, as well as through a host of other instruments not captured in the data.
For example, land-use subsidies are very challenging to identify and quantify.
Nevertheless, there is a strong correlation between the three instruments captured in our data, which may extend to more “hidden” forms of subsidies.
In OECD Member countries, subsidies:
Are not correlated with larger government ownership nor with steel firms’ size for cash grants.
Are correlated with larger government ownership for BMB.
Are not correlated with indebtedness (for either grants or BMB).
A possible explanation could be good alignment with the OECD Recommendation on Competitive Neutrality and other policies promoting non-discriminatory practices in the provision of cash grants and other forms of support to steel firms.
The low overall level of BMB in OECD Members countries reflects partly lesser government involvement in these countries’ banking sector and a greater reliance on bonds for corporate funding. It could also indicate that the risk of implicit government guarantees, which can lead private banks to offer loans at rates lower than the market, has been successfully addressed for steel firms overall.
In partner economies, subsidies:
are positively correlated with larger government ownership and larger firm size for both cash grants and BMB.
are positively correlated with higher debt to asset ratio, even when controlling for size, government ownership and profitability.
Effect of subsidies on Capacity Expansion:
Grants have a significant impact on capacity expansion in partner economies: a grant worth USD 1 million annually, sustained over a number of years, is associated with an increase of 5 000 to 15 000 metric tonnes in steel production capacity in partner economies, whereas grants show no correlation with capacity increases in OECD Member countries, a result similar to those of a previous study (Mercier, 2024[1]).
Regarding BMB, a USD 1 million in subsidies through BMB would increase capacity by about 1 000 metric tonnes during normal times, whereas anecdotal evidence suggests a strong counter-cyclical use of BMB in times of crises and its potential for allowing main recipients to maintain capacity through those crises, especially in partner economies.
Cash grants have an asymmetrical impact in partner economies: increases in grants are correlated with capacity increases, yet reductions in grants are not associated with any decrease in capacity, indicating that capacity, once installed, tends to remain stable despite decreased funding through grants.
Those findings highlight the risk of exacerbating global overcapacity through unchecked subsidy-induced expansions of capacity in normal times and the counter-cyclical impact of the use of BMB to avoid capacity reductions during steel crises times.