SHANGHAI -- China's output of low-quality steel made from melted-down scrap metal is on the rise again, raising concern that international steel prices will suffer.
The Chinese government has worked to stamp out illegal production of steel, which contributed to the country's overcapacity and disrupted the international steel market a few years ago. But steelmakers in some regions are resuming black-market production as the crackdown eased in response to an uptick in prices.
Now those prices are falling again, apparently in response to the intensifying U.S.-China trade war. Officials in the international steel industry fear that an increase in illegal steel production risks repeating the earlier glut.
Changzhou, about 200 km south of Shanghai, was once a thriving steel town, but it lost its shine due to the crackdown on illegal steel production last year. Among the steps the government took was cutting off electricity to plants that were turning out low-quality steel. The number of trucks operating in the city fell sharply as a result.
Now they are back. The sound of machinery rings out from plants and many people are seen working at previously idle sites. Steel scrap is piled in heaps on factory grounds, waiting to be melted down.
"We are starting to produce [steel from scrap], in addition to other steel products, though not as much as before," said a worker at one plant. The rebound in reprocessed steel began about six months ago, said the owner of a parts shop nearby. The steel "is getting into circulation because it is profitable, thanks to a pickup in steel prices," the shopowner said.
Steel was one of China's most profitable industries during the period of breakneck growth in the 2000s. But the growth of steel made from scrap and the presence of "zombie" steelmakers kept alive with government money pushed international prices lower.
Reprocessed steel, used as a building material and in other products, reportedly reached 100 million tons per year at one point -- an amount equal to Japan's entire crude steel output -- and was cast as the villain in the price disruptions.
Around 2016, President Xi Jinping's government began cutting off zombie steelmakers. The steel industry and regional governments resisted the move, citing the need for jobs and tax revenue, but authorities pushed ahead.
At a forum in Beijing in late March, Lyu Guixin, an inspector with China's Ministry of Industry and Information Technology, told steel industry officials that the government would not tolerate a resumption of illegal production. Such a restart would embarrass officials, who claim to have dealt with the problem. The industry, for its part, is worried, not wanting to earn a public rebuke.
The price of hot-rolled coil, used to make steel sheet for cars, home appliances and other products temporarily fell in China below 2,000 yuan ($289) per ton in 2015 but recovered to around 4,500 yuan in the summer of 2018, due in part to the end of illegal steel production. But the price began falling again last autumn. Steel prices and steelmakers' profits began to fall around the October to December quarter of 2018, Lyu said.
The latest hiccup was triggered by the U.S.-Japan trade fight. Chinese consumers have tightened their purse strings, worried about the country's economic outlook. The home appliance market has slowed, while new car sales fell for the first time in 28 years in 2018. The slowdown has hit the industry hard.
When the U.S. and China announced at their summit meeting last December that they would put off further tariff increases, steel prices turned optimistically upward, as the market bet the two sides were close to a deal. "Although the outlook has not become fully clear, prices will not fall as sharply as in the October to December period of 2018," said a steel industry official.
But after U.S. President Donald Trump announced higher duties on Chinese imports on May 5, steel prices began slipping again. They are now hovering around 4,000 yuan. The heating up of the trade war and the reappearance of illegal steel in China are combining to push prices down, although the fall is not as steep as in 2015.
"China's economic slowdown affects all of Asia and I don't want to see a slump in the steel industry come back," said an official at a Japanese steelmaker.