Nucor versus China.
The contest may sound lopsided, but Nucor chief executive officer Dan DiMicco launches his verbal missiles with gusto. He fired the latest volley during the company’s recent first-quarter earnings conference.
His gripe: A trade policy that allows China to export massive amounts of low-priced steel to the United States.
“President Reagan got it right back in 1985 when he said, ‘To make the international trade system work, all must abide by the rules.’ Above all else,” DiMicco said, “free trade is by definition rules-based fair trade.”
Shortly before the earnings conference, China — bowing to international pressure — had made a change designed to reduce its trade surplus in steel.
Products produced in China are subject to a value-added tax. For years, though, China has rebated some portion of the VAT on exported goods. The VAT rebate, complain U.S. steelmakers, effectively subsidizes China exports, contributing to a flood of low-priced steel in the U.S. market.
Low-priced steel is not all bad, of course. Flat-rolled steel of the type Nucor Steel Decatur makes, and China exports, goes into appliances, automobiles, construction equipment, barges and even wind towers. Those products tend to cost less if steel prices are lower.
DiMicco stressed that he had no problem with a level playing field. Something akin to a level playing field was supposed to result from China’s entrance into the World Trade Organization in 2001.
DiMicco said the reduction of China’s VAT rebate — still at 5 percent for some steel products — was not enough. China, he said, should impose an export tax.
The inherent barrier between U.S.-China trade is shipping, a cost that looms large when the product is steel. Nucor exports little steel, even when steel prices overseas are higher than in the United States.
“When prices are higher offshore that creates an opportunity, but they can’t just be higher by a little bit,” DiMicco said. “They have to be higher by enough to deal with the freight issues and the cost of getting it to the customer.”
China overcomes the shipping barrier in part with antiquated production facilities. Those facilities are labor intensive, a benefit to China with Nucor paying more than $30 an hour and China employers paying as little as $1. They also consume more energy and generate much more pollution than is permissible in the United States.
“The big issue is (that China steel makers) are virtually 100 percent government owned; or government financed, government backed and government subsidized,” DiMicco said. “Even one ton of steel coming out of China is one ton too many if you’re going to be playing by rules they agreed to when they joined the World Trade Organization.”
The problem with government control, DiMicco said, is it means the China steel industry responds not to the market but to political directives.
“At the end of the day, whatever action they do or don’t do, has to show up in their export numbers,” DiMicco said. “As of right now, they’re still exporting at record levels out of China to the world.”