China embarked on an aggressive drive to build its stainless steel production capacity in the late 1990s. Today it is the leading producer of stainless steel in the world.
Of last year’s total production of crude stainless steel of 28.4 million metric tons (mmt), China produced 5.3 mmt, a growth of 68% compared with 2005, based on new capacity which came on stream in 2006.
In the past decade the country has received the largest investment in stainless steel manufacturing of any county in the world, and its beneficiated product sector is growing rapidly. Product quality is also improving dramatically.
In a presentation last year to the South Africa Trust, Paul Runge, Head: Africa Business Unit for Emerging Market Focus, said China was rapidly making inroads in the South African market for downstream stainless steel products, making higher South Africans tariffs essential to safeguard local producers.
The Chinese state, he said, participated in capital formation, manipulation of input costs and direct bank financing. Chinese producers enjoyed preferential interest and tax rates, subsidies contingent on exports and favourable financing.
He said there was an apparent inability at the centre of Chinese government to calm down runaway capacity expansion and the country was set to become a net exporter in many intermediate stainless steel products.
Between 2000 and 2004, South African’s stainless steel imports – mainly in kitchenware, hollowware and flat products – from China rose from 4% to 10%.
Baking equipment manufacturers Macadams entered into a joint venture with a Chinese company in 1985, exporting ovens and other ancillary equipment from Cape Town to China for sale to international groups such as Carrefour and Walmart, and others, as they expanded in that country.
Today, Macadams has exited the partnership, that company is a competitor, China’s major supplier of baking equipment and one of the world’s largest suppliers in terms of units.
Other companies sprung from the relationship, started by former employees of the joint venture, who started competing by copying technology and designs supplied in those early days by Macadams.
Operating in South Africa and Africa, says chief executive Richard Wilkes, Macadams often comes across Chinese competitors eating away at the company’s market share at prices below Macadams’ costs.
His company decided years ago to confront this challenge head on and differentiate its business through quality, service, and support.
“We realised we needed to do what was difficult if not impossible for Chinese competitors, and add significant value to the ‘intangible’ part of our relationships with our clients; expand basket of offerings, reduce lead times, improve after sales service, and address other more fundamental issues such as personal contact and professional advice.”
Wilkes says the government needs to play a more defensive role, short of protectionism, and ensure that products imported are at least of the same specification as those available from local producers.
“If this attitude is adopted, quality is assured and dumping can be controlled somewhat. The Chinese, like the Americans and others, pay scant regard to the spirit of World Trade Organisation intentions and find many other, less direct ways of defending their own producers.
“Bureaucracy, difficult ‘safety’ legislation, constantly amending technical requirements for imported product and duties on assembled as opposed to unassembled equipment, are some of the more simplistic challenges that are offered by other countries in certain industries, usually where they have sufficient local producers,” he says.
In 1999 Macadams employed over 400 people in its manufacturing division.
Today it employs 150 in its assembly operation and uses outsourcing as a defensive measure against spiraling and unproductive labour costs. Wilkes says the Chinese will face similar issues in five years’ time.
India, he says, is the next threat. Labour costs there are one third of those in China.
Vulcan Catering Equipment managing director Margaret Crawford says it is difficult to assess the impact of Chinese imports.
She says maintaining a competitive advantage against all imported equipment is a challenge, but such competition will encourage the company to produce the best quality in the future. Vulcan intends to compete by focusing on niche markets and producing quality equipment at the right price.
Companies such as Vulcan could protect themselves against the inflow of Chinese imports through government protection or support for manufacturing companies using South African suppliers, which “unfortunately is not always possible”.
Stainless steel is currently 25% more expensive when bought locally.
It is also difficult to gauge the extent of copyright infringements because many infringements are third party imports, products given to Chinese manufacturers to copy and make for local distributors. Often insufficient backup, availability of spares and safety compliance are problems.
Gunhill Cutlers and Silversmiths’ Robert Hill says Chinese cutlery manufacturers until recently enjoyed a 15% subsidy from the Chinese state which made them highly competitive.
These manufacturers, who are now permitted to trade directly with their customers, are producing a product of very good quality.
“Now that they are able to trade directly they have learnt to speak English, they have excellent quality control and excellent engineers. And because they are subsidised they are very, very cheap.”
American pressure has led to a reduction in the subsidy to about 5%, and Chinese manufacturers are expected to increase their prices, even those of goods ordered by about 8%.
Despite this, the Chinese will still be able to produce top quality cutlery at about twice the cost of material. This is made possible mainly by the economies of scale achieved by the Chinese.
Ninety percent of all cutlery produced is exported, and China now supplies 60% of the world’s cutlery.
China first demonstrated the threat it poses to the South African stainless steel industry in the tank container business, according to the department of trade and industry.
Up to 2003 the local industry was the third-largest consumer of stainless steel in South Africa, making up approximately 12% of the market. It produced about 6 000 tank containers a year and generated export earnings of more than R800 million in the period.
It held 50% of the world market, with more than 80% of all tanks sold directly to shipping companies in Europe, Asia and North America.
From consuming nearly 19 000 tons of stainless steel in 1998, the industry’s consumption capacity dwindled to only 6 630 tons in 2004. The contraction continued and led to the closure of Trencor Containers and Consani Engineering in mid-2004 and early 2005. Almost 570 jobs were lost.
The main reasons for the contraction were the unfavourable exchange rate, the entry of competitors into the market, particularly China (Trenco’s manufacturing equipment was acquired by a Chinese company Chang Sheng), and increases in stainless steel prices.
In 2004, one of China’s tank container manufacturers opened a production line with capacity to produce 6 000 tanks a year, almost the same as the entire SA industry tank production capacity.
All that remains is to see how the other stainless steel sectors weather the Chinese threat.