Falling Demand for Commodities
Falling demand for commodities in general and rising exports from China in industries such as steel are depressing prices across many markets. Jobs have already been cut in the metal industries of a number of countries and closures of production facilities are increasingly being considered by global manufacturers in a bid to stem losses.
With the glut in supply across many of the industrial metals sectors, global producers are increasingly having to adapt to lower prices. While companies have made significant cuts to capital expenditure, it has taken longer for businesses to make decisions on the closure of production facilities. However, it is clear that global producers are increasingly being forced to turn to these measures, with mines being sold or closed and production capacity in the form of smelting and refining curtailed.
Looking at the global steel industry, production over the course of the year to the end of September has declined across a number of key according to statistics from the World Steel. Steel output in the United States, Japan, Turkey and Italy all saw notable declines – over 8% year-on-year in both the United States and Italy. Given this, it is clear that businesses in the UK are not isolated in the difficulties being faced. For instance, U.S. Steel has placed its Canadian operations in bankruptcy protection for over a year and further closures have been seen across the US and Europe.
While global steel production has fallen, the rise in cheap steel exports from China, where producers are benefitting from both devaluations of the yuan and government backing, looks continue to place pressure on steelmakers elsewhere. National governments have responded by placing tariffs on imports of steel from countries such as China and Russia. A recent ruling by the US Department of Commerce has placed preliminary duties on imports of some forms of Chinese steel. US imports of corrosion-resistant steel from China will now face tariffs of up to 236% following the first ruling of three trade complaints lodged by American steelmakers. The implementation of such measures should help to ease the challenges faced by the key producers in the markets protected. However, protection in most regions has yet to be implemented against all forms of low cost steel imports, pressuring certain producers. Further, China is increasingly lobbying for recognition as a market economy when its designation as a government-controlled economy expires at the end of 2016. This would make it more difficult to implement effective import duties on Chinese steel as they would have to based off of Chinese prices, which have been held artificially low by the government.
With little sign of a significant upturn in global economic growth in the coming year, it is likely to be some time before supply and demand for a range of industrial metals move into balance. This adjustment looks likely to be largely driven by the supply side. While some of this may be borne by China’s growing metal industry, with the Chinese government trying to manage the slowdown in its economy, it is likely that further closures and bankruptcies will be seen across other parts of the world.