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US Treasury Secretary Timothy Geithner
Anshan Steel’s investment in Steel Development Co (SDC) will not be the first time a Chinese steel company has taken a stake in a US steelmaker. The share it buys will not even be the largest.
Ceo John Correnti could have been forgiven, then, for expecting this latest deal to pass by largely unnoticed. If he did, over the last few weeks he must have been sorely disappointed.
When it comes to steel, the USA’s relationship with China is fractious. US mills have filed a litany of anti-dumping complaints against Chinese steelmakers. And industry leaders rarely resist the temptation of making political body-blows over trade policy.
Breathy forecasts from US industry experts of a Chinese government-funded steel tsunami, poised to hit American ports sometime very soon, have not helped.
Anshan Steel’s purchase of a stake in SDC, which Correnti says will not exceed 20%, could have been interpreted as a thawing in the tortured relationship between the two sectors. But news of the investment has raised hackles in the USA.
Some very influential players clearly do not want this deal to happen.
SDC’s proposition is clear. The company plans to build a 350,000 tpy rebar micro-mill in Amory, Mississippi. The mill will be based on groundbreaking technology supplied by Italian plantmaking specialist Danieli.
With only half the footprint of a conventional mini-mill, the facility will be able to convert scrap into finished products in only 67 minutes. This is made possible by coupling a single strand billet caster directly to an 18-stand rolling mill, a process dubbed continuous bar production.
This setup is far more flexible. It also provides an increased yield while reducing costs. If the first plant is successful SDC plans to launch a second, and then maybe a third.
It seems like a good business model.
But, over the past few weeks, the relative benefits of SDC’s strategy have taken a backseat. Anshan Steel’s planned investment in the project has triggered a politically charged controversy that shows all the signs of flourishing into an international relations crisis.
Exactly how much Anshan Steel plans to invest in SDC isn’t yet clear. But industry insiders reckon the Chinese steelmaker will take a share of something between 15% and 20%.
This might not sound like a lot. But it is enough to get politicians excited. The backlash from representatives on both sides of the house and from some parts of the US steel industry has been severe.
It’s obvious they do not like the idea of Anshan Steel taking a share in this kind of project and believe the investment is motivated politically rather than commercially.
The China Iron & Steel Assn (Cisa) sought to play down the dispute.
“It’s very common that projects will face opposition in the US, as the US promotes freedom of speech,” said an official at Cisa’s international cooperation department.
However, he was firm on one point: “This project is all commercial.”
“Cisa encourages domestic steel mills to go and invest overseas, but all the negotiations and mediations are carried out by the company, as an independent entity,” he said.
This was a point repeated by Anshan Steel, China’s sixth largest steelmaker by production last year.
In an email, the mill reiterated that its investment is “commercial in nature and based on market needs”.
Cisa would not normally get involved in a deal of this size. But the politics of the situation have quickly become complicated and show little sign of simplifying.
Still, the outcry over SDC’s deal with Anshan Steel is not just about freedom of speech. China will have to manage the situation carefully to safeguard the future of its investments overseas.
So far Cisa’s diplomacy has done little to reassure the US lobby. The Steel Caucus in the US senate Congress has asked the Committee on Foreign Investment in the United States (CFIUS) to examine the proposal.
This is a pretty strong step.
The CFIUS is an inter-agency committee that reviews deals which might result in foreign control of US businesses. It also determines their impact on national security. The organisation is fast assembling a track record of discouraging Chinese investments.
US Treasury Secretary Timothy Geithner will decide if an investigation is warranted. Anshan Steel’s ownership structure will not weigh in its favour.
“We believe the investment allows the full force and financing of the Chinese government to exploit the American steel market from American soil,” the Steel Caucus said in a letter to Geithner, which was signed by dozens of Democrats and Republicans.
The deal could give Anshan “access to new steel production technologies and information regarding American national security infrastructure projects”, the Caucus said.
It is right in one respect. The investment will be conducted by Anshan Steel’s listed unit, but the steelmaker is ultimately a state-controlled entity.
“Anshan is a state-owned company,” said an analyst in Shanghai. “The US may not allow such a company to easily have a presence in the US steel industry, no matter how small it is or if it has listed subsidiaries.”
“If it were a privately run steel mill doing [this], maybe it would be much easier to get the green light from the US authorities,” he said.
But the Caucus’s reasoning is largely flawed.
John Correnti
Take the “new steel production technologies” it referred to in its letter to Geithner. The technology SDC will use was developed in Italy by Danieli. This technology is not proprietary to the US, and is available to companies not just in other regions, but in China.
Presumably, if Anshan Steel really wanted to get its hands on Danieli’s latest long products engineering, a ticket to Udine via Venice and a cheque book would be all that were required.
The Caucus has not done itself any favours here. Industry insiders in the USA have noticed the problems with its logic as well.
“It is clear that the real authors of this letter are not members of the Congressional Steel Caucus but rather the domestic steel industry,” said Peter Brebach of Iron Angels of Colorado in aletter to AMM.
“An investment will be made to build one, two or more so-called micro-mills in the US for the production of steel concrete reinforcing bar, and someone sees this as a double threat,” he continued.
“Rebar is rebar, and its applications are limited to the reinforcement of concrete — the technology to be used was not developed in the US and can be bought on the open market.”
Now look at the Caucus’s concerns on national security. Is foreign ownership in a mill that provides reinforcement for concrete really such a compromising position for the US?
“If our national security is threatened because some Chinese company takes a 20% share in a new rebar producer, we are in much deeper trouble than I thought,” Brebach told AMM.
No wonder, then, that Correnti has dismissed the Caucus’s concerns as “laughable”.
If SDC is successful it will contribute to the US economy by creating new jobs and introducing new efficiencies to the country’s manufacturing sector. Chinese investment, government-controlled or not, will only help the project’s prospects for success.
“Yes, SDC will use cutting-edge technology on these mills,” Brebach continued. “But I don’t think that means all the work will be done by robots.”
“In other words, SDC will have to hire people, and the production of these mills might very well replace some of the rebar imports coming into the US, providing a net gain to the US employment picture,” he said.
American Iron and Steel Institute president David Phelps agrees.
“I think it’s great — Chinese currency coming back to the US to employ Americans,” he said.
“It’s fun speculation that Correnti will export product to China,” he told an AMM roundtable. “It might be cheaper (for China) to buy rebar from Correnti and bring it in than to make it.”
But there is still a large portion of the industry that remains to be convinced.
“The market already has too much competition and demand will not return for years,” said Steel Manufacturers Assn president Tom Danjczek. “The entry of a Chinese state-owned enterprise into the United States will significantly distort the US steel market and undermine core US economic values.”
Danjczek is an influential man. And his comments show that Correnti cannot just laugh the controversy off. He needs to convince the American public of the merits his project presents, not just his investors.
If future foreign investment in the US steel industry is to be safeguarded, let us hope he can argue his case successfully.
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