China is no longer the world’s factory

In la Tribune 02/08/2021

Politburo had decided at end of April : exports of 146 steel products manufactured by Beijing were no longer supported by export VAT exemptions. The leadership of the Chinese Communist Party is repeating this decision from August 1st, 23 new references whose exports will see these same exemptions eliminated. In addition, China will increase export taxes on certain steel mill inputs, such as cast iron and ferrochrome.

Also starting August 1, Moscow, for its part, is introducing a 15% tax on the export of certain metals, including steel, for six months.

These movements have profound consequences for the steel market and are the beginnings of a large-scale global industrial redistribution.

Beneficial for European steel mills

The rise in steel prices over the past six months has benefited European steel mills, but this is the tree that hides the forest. From now on, the question that will be asked is whether the European states have retained sufficient production capacity to support their own sovereignty sectors’ demand and others such as the automotive industry, or whether they will be too dependent on non-European companies.

For example, does our European Union have enough steel capacity to continue to build its warships, aircraft, tanks and all the vehicles needed by the military at acceptable costs – and with steel that meets ISR standards? Is it also totally independent to use “green” steel to repair a frigate or aircraft carrier that has been hit by a missile? Is the automobile industry, already handicapped by the shortage of electronic chips and under the technological sway of Asia for batteries, under the control of non-European steel producers who also comply with ESG standards? In other words, since the industrial renunciations of European steel consumers have made them very dependent on the outside world, is it to be feared that the environmental tax surcharges on base metals (and not on those of the stupid “rare metals” infox) will make way for my theory of competitive consumption stated a few years ago?

Click here about Competitive Consumption

Competitive consumption

There are still many questions, but we will have to wait for more information to find reliable answers. However, the context of competitive consumption is more precisely drawn.

First, Beijing justifies its VAT adjustments on steel exports by carbon neutrality in 2060. The means are stricter control of pollution from its industry, with the aim of keeping steel production below the level reached in 2020 and increasing recycling, since it now has a large stock of steel scrap. The Chinese steel industry is reforming thanks to the fight against climate change, its production units will no longer be the factory of the world. The collateral effect is also a reduction in local Chinese steel prices thanks to the redirection of their volumes to the domestic market.

Another consequence is within the last 10 years, annual Chinese steel production has almost doubled to represent more than 50% of world steel production, making China the world’s largest producer. Russia, for its part, is the world’s largest exporter of steel and, along with Turkey, the main exporter of steel to Europe, while the latter is introducing carbon taxes at its borders. Since the European steel industry is under-capacitated in relation to EU demand, the increases in the cost of Chinese and, secondarily, Russian exports on 1 August – if the latter continues beyond 31 December 2021 – will certainly benefit European steelmakers, but above all exporters of Turkish, Ukrainian and Indian steel to Europe. Moreover, even if the latter were also to increase their metallurgical taxes on exports, neither Moscow nor Ankara nor Kiev nor New Delhi have the steelmaking capacity to replace Beijing’s.

The EU will have to invest in its old industries

To guarantee its sovereignty, the Union will therefore have to invest heavily in old industries, which are heavy in carbon emissions. These investments in steel, cement plants, petrochemicals, freight transport (road or sea) or power plants will call for new environmentally friendly elements, such as hydrogen, but the whole will cost more.

Let’s take advantage of this to wring a young duck’s neck: hydrogen for the automobile. It’s an fool, a caprice, an illusion. The acquisition and operating costs of these vehicles are very high, while their electrical or environmental performance is far below that of an electric car equipped with a battery. In addition, the thorny issue of platinum in the ion exchange membrane of the fuel cell remains unresolved.

As a result, monthly sales of hydrogen-powered vehicles in the world leader in the sector, China, are in the dozens, and 70% of these sales are trucks, while worldwide sales of battery-electric vehicles are expected to exceed 5 million this year.

Finally, China’s world factory was a disinflationary boon to the global economy for the last 40 years, as it sought and offered ever lower costs. On the other hand, the closure of the world-factory for steel, via fiscal restrictions on exports, is increasing and will increase costs. This also foreshadows a new world for other materials without their global factory.

Global inflation will move north

However, if the world factory is no longer there, because the Chinese factory will work primarily for Beijing by virtue of competitive consumption, global inflation can only move northwards and the effects will be multiple on the superperformance of safe-haven assets, but also on the erosion of the value of currencies whose countries will have fallen into the trap of competitive consumption and the strengthening of others. Its corollary would also be to watch: supremacy of state crypto currencies of countries that will have better anticipated than others this reversal of global competitiveness.