In late May, I posted an article here called “What to Make of Anshan’s investment in the USA”. It was in reference to the investment by Chinese steelmaker Anshan in John Correnti’s Steel Development Company. The point of my piece was to explore why Anshan might do such a thing. The only real sense I could make of it was as an opportunity to provide US exports to China in place of importing considerably more than one ton of raw materials to China to make rebar. It was a contrarian attempt at finding reason where none seemed to exist.
Since my posting, a video has appeared which offers an explanation for the investment directly from an Anshan executive’s mouth. No, he doesn’t say they’ll export rebar to China, but I don’t think that would be a wise thing to say anyway. But his purported investment reasoning makes no more sense to me after watching the video than it did when they first announced. You be the judge. The video is below and, since a Nerds technical hitch about a week ago wiped out my original post, the original post (without the links) is re-posted below that.
[Original post from May 24th] There’s plenty of comment to go around on Anshan’s investment in John Correnti’s Steel Development Company, a rebar mini/micro-mill building vehicle that plans to build four or five mills in the US.
The objections to the deal are various. To some it’s an empty and irrelevant political gesture full of political meaning ahead of US-Chinese talks in Beijing. They claim that it’s akin to the investments by Japanese steel producers in the US following the migration of Japanese auto manufacturers here in the 1980′s to calm complaints about Japanese car imports. Those steel investments didn’t end too well, even though the car operations were very successful and helped save the North American steel industry by teaching it what quality looked like.
To others, it’s an unwelcome intrusion into the US industry by a state owned steel company when reciprocal investments in international companies (at least to own a majority of a Chinese steel producer) are not permitted. To still others, it’s an inexplicable investment in unnecessary North American steelmaking capacity.
Well nothing really happened yet. There isn’t one mill built let alone 4. But on the face of it, this is an odd move. One of the largest steel producers in the largest, fastest growing steel market in the world can think of nothing better to do with $175M than to buy into a start-up mini-mill company in currently one of the most anemic steel markets in the world.
And the purported reasons of wanting to learn about what the Wall Street Journal called ‘electronic-furnace technology’ or mini-mill operations really don’t pass muster. There are simpler ways of doing that without getting all this attention. Of course, it could just be a dumb move. John Correnti can be a pretty persuasive guy, and he needs a good equity partner to get things rolling on the mill investments.
But maybe that’s just what they want you to think. It’s political, irrelevant, unfair or dumb. What if it isn’t? Let’s just pretend for a moment that everyone knows what they’re doing. How could this strange little investment actually be a clue to something much more interesting? Here’s how.
China needs steel and lots of it. It’s industrializing at a remarkable clip. So far it has protected its steel industry because it was strategic to its purpose. Given the evidence of past industrialization stories (Japan and Korea) many people outside China have expected it to become a large net exporter of steel. ArcelorMittal executives make a good argument against this expectation when they tlka about how by doing so the Chinese would be shooting themselves in the foot, not just because they would be exporting into a hostile trade arena, but because every ton of exported steel requires them to import a ton and a half of iron ore, a ton and a half of coal and so on. It clogs the supply chain, raises freight rates, raises raw materials prices with little net benefit to China.
China is interested not in being just any old economy but in being a very successful one. There’s another story of industrialization that I’m sure they pay attention to – the USA. The US has been a net importer of steel since 1958. This has been cause for complaint in some quarters (too many imports), or of scorn in others (the US producers can’t export). We have always held this fact to reflect an efficient use of resources in the most flexible economy in the world. Leave the rest of the world to supply some portion of steel demand (it was declining in price for 30 years) and we’ll invest in new and more exciting sectors. You don’t have to be – indeed you might want to avoid being – long in steel, if you want to be a successful economy.
So how does this bear on Anshan’s move? Well it would make sense (and this is is the only sense it really does make) if the purpose of the investment was to make rebar to ship to China. Yes. Make rebar to ship to China. You don’t need pig iron to make rebar. But every ton of it made in China jams up the inbound transportation system by importing all those raw materials and raising prices on commodities and freight. It also adds to emissions from blast furnaces and coke batteries that will become more costly. So, what if you made rebar overseas using the most appropriate raw materials and shipped it? (China has little scrap for the foreseeable future and has been a leading importer of US scrap.) In stead of importing 3 tons plus of raw materials to make it, you import just one ton of the finished product. The Chniese planners think in these macro terms. It’s a big country and someone’s got to build it smartly.
So why don’t they just say that? For four reasons I can think of and maybe more. First, if Anshan actually said that was what they were doing, asset prices in North America (and elsewhere) would skyrocket. Second, if that’s what they want from overseas, they are going to have to open up the Chinese industry to investment by outsiders. Third, it would tip their hand to the raw materials suppliers who they are constantly trying to outmaneuver. Fourth, they might not be convinced that it’s the best thing to do just yet. It is after all only a small gesture towards meeting a massive need.
So, for the moment at least, they might just be happy to let you think it’s a political, unfair or dumb move. Not (perhaps) the most significant investment in the steel industry since Mittal bought Arcelor.