The world is about to have a good old-fashioned glut on its hands, courtesy of China’s problematic economy.
And the world is already starting to feel the pain.
The problem is that China’s got too many companies producing things like coal and steel, and the state-owned enterprises (SOEs) doing this have racked up debt that’s now eating up their profits.
The government is trying to shift the whole economy from its dependence on manufacturing, and it has already said that millions of people in some of these industries are going to be laid off in the next few years.
But China can’t just shutter these companies overnight, because they still need to pay back the banks holding their debt and it would be an unmitigated disaster for employment.
So these products have to go somewhere, and that means they’re going to be exported to the world. There are a bunch of industries that need this treatment too. China’s crude steel, aluminum, shipbuilding, chemicals, cement, refinery products, flat glass, and paper will all have to be unloaded on the world, whether the world needs them or not. (Mostly not.)
Just getting started
The steel industry already offers a good example of what might be in store because China has made the most progress in dealing with that industry’s problems.
Let’s put it this way: You know a problem is serious when China’s tightly controlled state media outlets are allowed to talk about it in blunt terms. Here’s Xinhua:
Sagging demand has already impacted China’s steel industry. The State Council, China’s Cabinet, announced earlier last month that crude steel production capacity will be slashed by 100 million tonnes to 150 million tonnes over the next five years.
The situation is so severe that the government predicts some 500,000 workers in the industry will be laid off.
In 2015, China produced about 804 million tonnes of crude steel, but only 664 million tonnes of steel products were consumed last year, according to the government-led agency China Metallurgical Planning and Research Institute.
This is the government getting the people ready for job losses and, in some cases, relocation. Former steelworkers are already being turned into security guards and cleaners. Otherwise, workers will be out of a job, collecting checks from federal authorities. So problem acknowledged, right? Yes, but it doesn’t mean anything’s going to happen soon (back to that needing to pay down the debt issue). China’s biggest steelmaker, Baosteel, is still planning to increase output by 20% in 2016.
And all of that supply is about to be unloaded onto a world that doesn’t really need it right now.
Here’s Macquarie Group:
Of course, what this will do is keep the price of steel (and any commodity where this dynamic is at play) really low.
Tata, for now
Obviously, China isn’t the only country that makes steel.
That means other steelmakers aren’t loving what’s going on. US Steel, for example, said on Wednesday that it would be laying off 25% of its nonunion workforce.
“This is part of the ongoing adjustment to staff levels and operations due to challenging market conditions, including fluctuating oil prices, reduced rig counts, depressed steel prices and unfairly traded imports,” a US Steel spokeswoman said.
Commodities prices around the world, including iron ore and steel, ticked up after the month of February, but they’re still at record lows, and down significantly from this same time last year. The structural issue – low demand – that is keeping commodities prices down hasn’t changed.
It’s even worse in the UK. Last month, Indian behemoth Tata said that it would sell its UK steel division, rejecting an expensive turnaround plan for the company. British politicians immediately went to work saying how horrible this would be for an industry vital to the country.
Even the royal family is getting involved; The Telegraph reports that Prince Andrew talked to Chinese President Xi Jinping about the issue on a visit to China.
Call that political posturing if you want to, but it doesn’t matter. In an increasingly isolationist and distrusting world where politicians are gaining traction by attacking free trade from the right (the Donald Trumps of the world who think China is “winning”) this could become an important geopolitical issue.
China has only just begun to unload its excess supply on the world, so this unloading process is only going to get worse. It’s only going to spread to more industries and impact more countries.
And it won’t stop until the world has sopped it all up.