Why EU trade policy matters for steelmakers in 2017
Posted on 06.02.17 by
The issue of significant steelmaking overcapacity in China – which is estimated to be in the region of 300 million tonnes, broadly double the level of annual EU steel consumption – has led to a rapid and substantial increase in Chinese steel exports in recent years, as it seeks to find a market for its excess capacity. In 2015, we saw Chinese exports exceed 100 million tonnes for the first time, and, although finalised figures are not yet in, we expect they remained at that level for 2016.
By Frank Schulz, Vice President, Head of European Government Affairs
If we take Europe as an example, in 2009, China exported 2 million tonnes of finished steel to Europe; in 2015 this rose to 9 million tonnes, with many of the imports infringing anti-dumping rules. It is therefore no surprise that we saw a number of trade cases initiated and ruled on in Europe last year, with potentially more to come. At the time of our third quarter results, in November last year, Mr Mittal said, “Overcapacity remains a concern, reinforcing the importance of a comprehensive trade response to minimise the impact of unfair trade across all product categories.”
Alongside highlighting the need for EU trade action, we also supported Eurofer’s calls throughout 2016 for trade defence instruments to be modernised and worked with Eurofer and AEGIS, a body representing almost 30 European manufacturing industries, including Eurofer, to highlight and campaign against the possibility of China being granted market economy status. These issues, alongside planned changes to Phase 4 of the EU’s flagship climate change policy, the EU Emissions Trading System, which runs from 2021-2030, generated a large amount of headlines throughout 2016.
So what we can expect in 2017?
It’s first important to provide a little background into what the issue of China being granted market economy status is really about. For a country to be deemed a market economy – one where traditional market forces of supply and demand dictate market conditions – by the European Union, it needs to meet five criteria. When last tested, in 2011, China only met one of the five criteria, and experts say that it has made no progress since 2011 in meeting the other four. So it’s crystal clear that China isn’t a market economy, according to EU rules.
However, on 11th December 2016, 15 years on from the date of China’s World Trade Organisation (WTO) accession protocol, a certain provision of the protocol expired. The provision covered the methodology that other WTO members could use in anti-dumping (AD) trade cases against China. So the reality is this issue has never been about whether China is or isn’t a market economy, but about the methodology countries, or in the case of the EU, a regional bloc, can use in AD cases against China.
The methodology used in AD cases is a technical matter. The key point is that the methodology used in cases against non-market economies allows you to start from a point where you use prices and costs from a third party, ‘analogue’ country, as prices and costs in the non-market economy are not market-based prices; they are considered to be skewed by state influence. This is a very important point, as the ‘analogue’ country methodology tends to result in higher dumping margins, which I would argue is a fair approach as it balances out the benefits producers from non-market economies get from state influence and support.
So the debate has centred around what the expiry of this certain provision means and the impact it will have on countries that bring anti-dumping cases against China. Legal opinions on what it means diverge; I’ve sat in rooms with some of the most experienced and technically qualified trade lawyers in Europe, and they have struggled to agree on what it means, which highlights what a complicated, technical legal issue this is.
As you would expect, China has argued it should be automatically granted market economy status, despite the undisputable fact that its economy hasn’t made the required progress to be considered so. The US has been very clear from the start that it doesn’t consider China a market economy, and has no intention of changing how it approaches AD cases against China. The EU, on the other hand, has somewhat sat on the fence, and even today, there remains a lack of clarity regarding some details of the new AD methodology the EU has proposed.
That’s not to say, however, that we haven’t made progress. On 20 July 2016, EU Trade Commissioner Cecelia Malmstrom gave a statement in which she clearly stated that China is not a market-economy. She additionally said that the EU intends to delete its list of market economies and non-market economies, thereby making EU legislation “country-neutral, applying equally to all WTO countries” and proceeded to state, “With this proposal, we create an additional, new non-standard methodology that takes into account distortions provoked by State intervention, in a given country or sector. The new methodology would lead to approximately the same level of anti-dumping duties as today.”
At the time of this statement, no further detail on what this new, ‘non-standard’ methodology would be was presented. So while I was pleased, and there were indications that the EU Commission had listened to our concerns, final resolution of this matter remained unclear.
The Commission then announced its proposal on 9 November last year. There are two aspects that I would like to highlight from the proposal. First, the Commission acknowledged that in certain countries that are WTO members, domestic prices and costs can be distorted owing to state influence, or in other words, prices and costs in non-market economies are influenced by the state. Secondly, the Commission stated its intention to prepare and issue reports describing the specific market circumstances in any given country or sector, and point out if prices and costs in the exporting country are unsuitable to be compared to the export price in order to calculate AD tariffs.
Broadly, we were pleased that the EU has not granted MES to China and with their new proposal; the Commission is making the appropriate efforts to apply meaningful AD duties on products from countries that don’t respect the principles of rules-based international trade. However, we are still in discussion with the Commission to understand the details of the proposed approach.
Since 11 December 2016 not much has changed. The Commission’s proposal has to follow the normal European legislative procedure, and will only become effective once it is ratified and adopted by the European Parliament and European Council. It is difficult to put an exact time frame on when that will be, and until that happens, the EU’s existing AD and anti-subsidy laws remain in force.
However, two things of note have occurred. First, the US has done nothing. This is important as one thing the Commission is attempting to achieve is move its approach closer to that of the US. The fact that the US hasn’t moved, and still views China as a non-market economy, is materially different from the approach proposed by the EU, given it intends to do away with the five criteria approach to identifying market economies. This is important as it raises questions about how the EU’s approach aligns with the WTO legal framework.
Secondly, China has, as was expected, reacted, and launched a legal challenge, therefore taking the first step towards launching a case with the WTO. It is seeking consultations with both the EU and US, and seeking a WTO panel to rule on the matter. It’s likely that a ruling on the matter could take a number of years. The concern with this – albeit not for ArcelorMittal or the steel industry given we don’t export to China – from a global trade perspective is that China could also take action outside the WTO by imposing retaliatory tariffs, potentially sparking a trade war.
The issue EU trade defence instruments (TDI) and the need to reform them to deal with today’s trade issues has been rumbling on for quite some time. In fact, the EU Commission put forward a proposal to reform the EU’s TDIs in 2013, but the proposal didn’t make it through European Parliament and hence no change was enacted. There are two key drivers behind European industry lobbying for reform on this matter.
European industry has long bemoaned the length of time it takes for the EU to rule on AD cases, given they take, on average, 20 months from start to finish. Even if a case is proven, there is no guarantee that provisional measures which are usually introduced follow a ruling will become permanent. This is too long, particularly as retrospective action cannot be taken. In the US, not only are cases decided faster, retrospective action is allowed. As a result, US industry is far less exposed to the effects of dumping than its European counterparts.
On top of this, the EU is the only region in the world that applies something called the Lesser Duty Rule. In EU AD cases two margins are calculated, one dumping margin and one injury margin, and the Lesser Duty Rule then means that the lower margin – the lesser duty – of these two duties is applied. This regularly results in lower tariffs in the EU than elsewhere in the world.
Let me give you an example. In the past year we have seen a cold rolled coil AD case against China on both sides of the Atlantic. In the US, an AD tariff of 256.44% was applied. In the EU, on exactly the same case, the same product and the same Chinese steel producers, the tariff applied was 19.8% to 22.1%. Why? The Lesser Duty Rule. Now I’m not saying that the same dumping margins should apply, and the US margin applied was unusually high as the Chinese producers chose not to defend themselves in that particular case, but in the EU case the dumping margin calculated was 60%, and the reason we ended up with an applied dumping margin of 19.8% was because the injury margin calculated was between 13-16%. This approach doesn’t happen anywhere else in the world and, similarly to the point I made about the EU needing to align its approach with the US on the MES issue, there should be global commonality in TDIs in order to ensure global trade is fair.
This is why TDI modernisation is such an important issue for us.
There has been some progress on this and again, I applaud the Commission for its willingness to listen to our concerns.
What has actually happened is that the Commission has combined how it plans to deal with the China MES issue with TDI modernisation; the proposal it has made covers both areas. They are trying to kill two birds with one stone.
I can understand why, to an extent, but these are two fundamentally different issues, and it is critically important that the proposals are thoroughly assessed by all stakeholders and at all levels of European Government, to ensure that they effectively address both matters.
The proposal – the same proposal tabled by the Commission on 9 November last year – does represent progress. It will introduce provisional dumping measures two months earlier than is currently the case. This I am pleased with. It will also allow the Lesser Duty Rule to be lifted under certain conditions, namely when prices are influenced by raw material or energy price distortions. The issue is that the proposal includes thresholds for raw material distortions which are too high. The new proposal is something, but not enough – it doesn’t level the playing field and align with the US approach – and I do hope that we will see further reform in this area.
Ensuring the EU effectively deals with the China MES and TDI modernisation issues, and we have the tools to address unfair trade practices is very important to our industry. The EU ETS however is absolutely critical. I cannot stress enough how important it is that we achieve reform to this policy; it is without a doubt the single most important policy issue ArcelorMittal faces today. Without reform, the system puts the sustainability of the entire European steel industry in jeopardy. This is why we and Eurofer have been calling for reform for some time.
Before I comment on where we need to see reform, and why we feel what we are asking for is justified, it is very important to first say that we recognise and support the need to transition to a low-carbon economy and are committed to contributing to achieve this requirement.
Europe has developed and proposed the EU ETS as the cornerstone of its policy initiatives designed to combat climate change. The system covers all European energy intensive, carbon emitting industries, and places a price on every tonne of CO2 emitted. It is a highly ambitious scheme that aims to, by 2030, reduce EU CO2 emissions to a level 43% lower than those emitted in 2005. I’m sure everyone would agree that climate change is a very serious issue, and I applaud the principle of the EU’s approach. However, in the context of the global steel industry, the EU ETS scheme is fundamentally flawed.
Climate change is a global issue and the EU ETS scheme, as proposed, will not result in a decrease in carbon emissions from the global steel industry, and will ultimately prove to be counterproductive in the global steel industry playing its role in limiting global temperature increases to two degrees.
It would result in an increase in steel production in other regions of the world and an increase in the volume of steel imported into Europe to meet demand needs. It will not change how steel is made – hence why I don’t believe it will deliver decarbonisation benefits in the steel industry – but where steel is made. So the first thing that we are asking for is for the Commission to appreciate that the impact of the ETS is not the same for every sector it covers, and allocate a higher proportion of free emission allowances to sectors, such as steel, that can be clearly identified as being at risk from the ETS.
I mentioned the word ‘allowances’ just now, which warrants explanation. Allowances, or carbon credits, lie at the heart of the scheme. For every tonne of CO2 a company emits, a proportionate amount of allowances need to be handed over. A proportion of these allowances are gifted, based on something called a ‘benchmark’ and the shortfall needs to be purchased.
And now I’ve mentioned the word ‘benchmark’ so I’ll have to explain that! The ‘benchmark’ is used to calculate the number of free allowances given to each individual facility, in our case a steel plant. The benchmark is supposed to represent the most efficient facility, and the further away from the benchmark a facility is, the more allowances it is therefore required to purchase. The logic, which I agree with, is to incentivise less efficient, heavier emitting facilities to invest in technology in order to reduce emissions and therefore play ’catch up’. The problem for the steel industry is that the benchmark has been set at a level that doesn’t exist at any steel plant in the world. It is totally unrealistic and unachievable, and steel is the only sector covered by the ETS where this is the case.
So we’re asking for reform, and realism. The benchmark should be re-calculated and represent Europe’s most efficient steel plants. The top 10% most efficient steel plants in Europe should be gifted allowances that directly match their emissions output. If this was to happen, it would effectively incentivise poorer performing plants to invest and improve.
I talked earlier about how the scheme could lead to an increase in steel being imported into Europe, quite probably from regions that aren’t exposed to a carbon tax, and produce steel in a far less efficient, more polluting manner than European steel companies, which are some of the most technologically advanced and efficient plants in the world. This is known as carbon leakage. So to avoid this we want to see all steel consumed in Europe exposed to the same carbon tax, irrespective of where it is produced, in order to ensure a level playing field and that European producers are not at a competitive disadvantage to global peers.
There are two final areas in which we are lobbying for change. First, the scheme doesn’t take into account our obligations to the power sector. Many of our European steel plants capture blast furnace waste greenhouse gases and transfer them to power stations, where they are used to create energy. Not only are we not rewarded for capturing and re-using the gases, but we are then also forced to hand over allowances, in proportion to the waste gases we capture, to the power station owners. This defies any common sense. Surely policy should be rewarding proactive measures to recycle and re-use emissions?
In the same vein, as you may know, ArcelorMittal is leading the way in exploring breakthrough technologies to capture waste gases and transform them into other products. We have a pilot project at our plant in Ghent, Belgium with a company called LanzaTech to capture carbon monoxide and convert it into bio-ethanol. Although these type of breakthrough carbon capture and re-use technologies are at an early stage, they offer hope for the steel industry, as we’re at the physical limits of what is possible in terms of reducing carbon emissions from steelmaking via the blast furnace route. But, amazingly, these types are projects aren’t recognised or rewarded in the ETS.
Getting changes to this policy is critically important, and if we can succeed in getting amendments in line with those I have outlined then it will make a vital difference to not just ArcelorMittal’s European business, but the entire European steel industry, and every person it employs.
We have, made progress, but nowhere near enough. Some EU member states have changed their position and suggest a reform of the ETS we can agree with. But the group of member states is not yet sufficient in size to have a majority. Also, the European Parliament has recently made a reform proposal that moves in the right direction. We really need to see more movement in the policy, and see it soon. This year is critical. Even though the changes to the ETS don’t come into effect until 2021, it is quite possible that the policy could be finalised, or at least have gone to a position where it will be incredibly difficult to change, before this year is out.
There is a very important vote which is scheduled for 15 February, when the European Parliament will review the Commission’s ETS proposal. Parliament has already made suggested amends to the Commission’s proposal, so their vote, while not 100% final and binding, as they then need to negotiate with the European Council before it becomes law, it a very important step. We need to find a way to effect change, now.