Posted on 20 May 2020

 

Source: Foreign Policy

In Indonesia, a vast new stainless-steel plant can produce an impressive 3 metric tons of the shiny metal each year. And the plant isn’t even an Indonesian venture. It was built by a Chinese market giant that is using the country to undermine Western competition. Those who think stainless steel is a fringe sector should think again. The unglamorous metal is vital to everything from cutlery to aircraft, tankers, and surgical instruments. China’s sneaking takeover of the global stainless-steel market will put other sectors at risk, too.

The Indonesian plant, owned and operated by the Chinese stainless-steel firm Tsingshan, opened in 2017. The choice of location was no coincidence: Indonesia has the world’s largest reserves of nickel, a key component of stainless steel. More than two-thirds of the world’s nickel is used to make stainless steel. (Regular steel consists almost exclusively of iron, while stainless steel also contains nickel and chromium.) And the plant’s construction was supported by the Chinese government; indeed, it falls within China’s global Belt and Road Initiative. 

Then, when the plant had operated for less than two years, the Indonesian government suddenly announced that it would ban exports of nickel starting in January of this year. Predictably, the move caused global nickel prices to skyrocket. But thanks to its Indonesian plant, Tsingshan is shielded from the nickel hike.

 

In the past two decades China has conquered the stainless-steel market. Though stainless steel may seem unsexy, it’s vital to virtually every other sector, and production is growing faster than that of other metals such as lead, copper, and aluminum. Weaponry, pipelines, ships, and washing machines all contain stainless steel. And in the past couple of decades, the production of steel—the main component of the stainless kind—has shifted dramatically.

In 2004, the world’s top 10 steel producers included only one Chinese company, Shanghai Baosteel; the other top firms were American, European, Indian, and South Korean. Back then, just 25.8 percent of the world’s steel was made in China. In 2018 (the latest year with data available), six of the world’s largest steel companies were Chinese, some of them government-owned, and China accounted for 51.3 percent of global steel production—a figure that doesn’t capture production by Chinese companies in other countries).

On the global top 10 list, South Korea, a former steel giant, is represented only by Posco. In stainless steel, the development is even more stark: in 2005, China produced 12.9 percent of the world’s stainless steel, while Europe produced 34.8 percent and the United States 9.2 percent. By 2018, China had more than quadrupled its share to 52.6 of the world’s stainless steel, while Europe’s share had shrunk to 15.6 percent and the United States had just a 5.5 percent share.

 

Until recently, steel and stainless steel may have seemed unworthy of concern. Indeed, President Donald Trump’s efforts to protect the U.S. steel industry were met with plenty of ridicule because the measures – supposedly taken to enhance U.S. national security—also penalized companies based in European countries, Washington’s closest national security allies. The U.S. president’s punishment of European steelmakers through Section 232 of the Trade Expansion Act two years ago was undoubtedly ridiculous, but he was right in treating steel as a strategic good; the coronavirus pandemic has shown that Western countries are dangerously dependent on components from China.

Not surprisingly, U.S. firms have long been concerned about the way Beijing financially supports Chinese steel companies. In a 2016 report, a group of U.S. steel industry associations wrote that Chinese firms receive “loans [that] are granted based on alignment with central or provincial governments’ policy directives, rather than creditworthiness or other market-based factors.”

In a 2019 report, the Mercator Institute for China Studies, a German think tank, documented how Beijing’s financing practices vastly distort global competition: The “panoply of financing benefits empowers Chinese companies with advantages over foreign competitors not only at home but also when they engage in foreign takeovers, with relative disregard for commercial risks, allowing them to offer premiums for foreign assets if necessary. These practices disfavor European companies as acquirers of firms and assets,” the authors wrote.

 

Such government support, of course, results not just in more acquisitions by Chinese outfits but also in lower prices for their goods, too. Over the years, European firms have discovered not just competitive prices by Chinese outfits but also outright dumping. That caused the European Union to, in 2015, impose a 25 percent tariff on Chinese stainless steel. Then, last year, stainless-steel exports from Indonesia to Europe suddenly skyrocketed.

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