TOKYO -- The U.S.-China trade war is adding to excess supply for products from steel to soybeans, with export-discouraging tariffs in the U.S. and weakened equipment investment in China causing stockpiles to build up and prices to deflate.
If Washington and Beijing fail to break their trade deadlock by the March 1 deadline, a new wave of tariffs will automatically kick in, heightening the risk to the global economy in a parallel to how protectionist policies drove down prices in the 1930s and exacerbated the Great Depression.
Prices for Japan's exports of hot-rolled steel coil -- used in appliances and construction materials -- to the rest of Asia have fallen to about $550 per ton, down from more than $600 in the fall. Exporters were able to close some contracts before the Lunar New Year. But "we can't predict when prices will stop falling," said a sales representative with a major Japanese steelmaker.
The problems stem from a drop in prices for Chinese-made hot-rolled steel coil. Export prices fell roughly 20% from last summer to around $467 per ton as of late January. The administration of U.S. President Donald Trump slapped extra 25% tariffs on steel products from China and elsewhere starting in March 2018. According to official statistics, China's exports to the U.S. for January-November fell 14% year on year.
China's equipment investment has also slowed due to fears about the trade war's economic impact. Domestic demand is losing steam. Global consumption of iron and steel in 2019 will climb 1.4% on the year to 1.68 billion tons, estimates the World Steel Association -- slowing significantly from 2018's 3.9% growth, in a stark reflection of China's stalling demand.
The gap between crude steel output and steel product consumption widened by 12% in 2018 to about 150 million tons. China's closing down of excess steel production capacity and its falling asset prices had helped balance supply and demand, but the gap has now widened more than 30% from its slimmest spot in recent years, in 2016. Increased output in markets like China played a role.
It is difficult to picture a decrease in global output in 2019 that would shrink the supply-demand gap, voices in the steel industry have said. While China is expected to continue adjusting output capacity, there are signs of increased output elsewhere, such as United States Steel's restarting of some blast furnaces.
U.S. newspapers report that with steelmakers like Nucor adding equipment, American steel production capacity is set to rise 16 million tons, or 18% over pre-trade war levels. The U.S. is beginning to show its own signs of oversupply as sales flag for the auto industry, a chief consumer of steel products. American prices of hot-rolled steel coil have fallen to about $760 per ton from over $1,000 per ton in July.
Japanese businesses are facing pressure to address gluts as well. The country's biggest supplier of raw materials for nylon fibers, Ube Industries, may be forced to lower production for the first time since 2012. Export prices to the rest of Asia for caprolactam, used in fibers, have fallen rapidly due to excess supply, with spot prices in late January hitting $1,670 per ton -- 15% below the previous month.
China accounts for half the world's demand for nylon fiber feedstock as a major producer of the material. With the Chinese economy cooling due to trade friction with the U.S., Chinese textile makers expect apparel demand to drop. "They want to keep as low a stock as possible of materials," said an Ube representative.
Also weighing heavily is an expansion of facilities in China on expectations of medium- to long-term demand growth. Facilities starting up there add output capacity of more than 100,000 tons, or about one-third Japan's total capacity, fueling a sense of oversupply.
Soybeans face similar problems. The U.S. Department of Agriculture expects world soybean stores to grow 9% on the year to 106.72 million tons in autumn 2019. In the U.S., the crop's trade volumes have thinned due to retaliatory tariffs imposed by China, and expanding exports to Europe has failed to make up the difference, leaving stockpiles growing. Brazil has also upped production in an effort to capture Chinese demand.
Planting has gone at a faster clip compared to other years, said Akio Shibata of Japan's Natural Resource Research Institute. Meanwhile, international prices of the crop have fallen year on year.
Countries tend to reap the most profit when they specialize in producing particular goods for which they have a comparative advantage -- meaning they enjoy lower opportunity costs to make them than other countries do -- while importing other products.
In the 19th century, British economist David Ricardo extolled the virtues of free trade based on the principle of comparative advantage. The idea caught on worldwide and contributed greatly to economic development.
But this order began to break down in the 1930s. The economically depressed U.S. slapped high duties, known as the Smoot-Hawley tariffs, on agricultural and other goods to protect American business. The U.K. and other countries likewise put up tariffs and other defenses. The resulting crash in international trade is seen by some to have deepened the Great Depression.
The current turmoil in the global economy falls short of that seen in the 1930s. But "as long as China's excess production and excess inventory go unresolved, it is possible downside risk will build in the medium term," said Ryutaro Kono at BNP Paribas Securities.
If trade restrictions drag on -- for instance, if the U.S. and China fail to reach a quick agreement -- supply gluts will grow, adding deflationary pressure.