Global Steel Trade; Structural Problems and Future Solutions

The attempt to continue business as usual ignored the reality of a 70 percent plunge in Russian internal
demand. As a result, large quantities of steel production flowed onto the global market at prices that caused
serious disruptions. While the problem crested in 1998, it had been building throughout the late 1990s as
international trading companies sold vast quantities of low-priced Russian steel on the global market.
Japan. Despite the Japanese steel industry’s status as an efficient, developed sector, it has continued to
benefit from practices that shelter the industry and inhibit changes consistent with market forces. The most
significant problem is a noncompetitive domestic market among the integrated steel producers.
Apparent coordination among integrated producers is reflected in the following market characteristics:
• Production shares among the major Japanese companies essentially have not changed for twentyfive
years. Steel experts in Japan and the United States have cited this fact as the clearest sign that a
cooperative arrangement exists. The Japanese Fair Trade Commission has also expressed concerns over
the stable production shares.
• Japanese steel imports have remained consistently low. Despite high domestic prices, which should
be a magnet for imports, the volume of imports into Japan has been persistently low. The cause appears
to be a relatively closed distribution system and complex web of mill-to-mill arrangements that have the
effect of limiting imports.
• Japanese steel producers have maintained high domestic prices. The major purchasers in Japan—
so-called “big buyers” such as auto and construction firms—have paid persistently high prices for steel.
The apparent lack of meaningful competition between Japan’s major producers has contributed to the longterm
problem of surplus capacity. Revenues from the high-priced domestic market also confer competitive
advantages for Japanese firms that have implications for global steel trade. Enhanced revenues in the
Japanese market can be used to make producers more cost competitive, for example, by funding research
and development, and to sustain low-priced exports.
Korea. In Korea, the steel industry expanded capacity through, what were in hindsight, overly ambitious
projects; in many cases, these projects were made possible by unsound lending by private commercial
banks and government-owned banks. Lending decisions of private banks were often subject to direct or
indirect government influence. The financial sector reforms that Korea has implemented under its
International Monetary Fund stabilization program have had some success in changing these practices.
However, it is still unclear whether all of the past market-distorting practices have been eliminated.
Government support for Korea’s largest steel producer, POSCO, has given that producer a monopolistic
position that raises a fundamental concern about competition within the Korean steel market and possible
trade effects. Further, as a government-owned company, POSCO was used by policymakers to further the
government’s industrial development objectives, which included the provision of low-cost steel to
downstream producers. The Commerce Department found this practice to be an export subsidy in a recent
countervailing duty investigation. The Korean Fair Trade Commission (KFTC), Korea’s antitrust authority,
recently has recommended breaking the giant into two separate companies because of anticompetitive
effects on the domestic market. But the Korean government so far has decided not to implement that
recommendation. The KFTC also raised concerns about POSCO’s continued dominance in Korea because
of the company’s potential to abuse its market power.
Brazil. Although Brazilian producers did not increase their exports of certain products to the United States
to the same extent that the other three countries did, they did engage in significant price cutting in order to
maintain export volumes. Over the last decade, Brazil’s steel sector transformed itself from state to mostly
private ownership. While this has led to a greater role for market forces, the Brazilian steel sector has
continued to benefit from the advantages of a domestic market insulated from real competition.
38 Global Steel Trade: Structural Problems and Future Solutions