Estimation of Japanese Steel Product Trade

Elasticity of Substitution

Junichiro Oda*, Takashi Homma, Keigo Akimoto

Research Institute of Innovative Technology for the Earth (RITE)

Kyoto, Japan

*Contact us: jun-oda@rite.or.jp

The 15th IAEE European Conference 2017

September 3-6, 2017

Hofburg Congress Center, Vienna, Austria

-1

0

1

2

3

4

2005 2007 2009 2011 2013 2015

Vo

lum

e (

Mt/

y)

Japan's Exports

Japan's Imports

2017

0

25

50

2001 2003 2005 2007 2009 2011 2013 2015

Vo

lum

e (

Mt/

y)

Japan's exports

China's exports

Contents 2

1. Introduction

2. Analysis 1:

Price elasticity of substitution between

Japan’s export and Japan’s import

3. Analysis 2:

Price elasticity of substitution between

Japan’s export and China’s export

4. Summary

Heavy plate

Flat-rolled steel products

0 25 50 75 100

Import from global

Export to global

Japanese production

(Mt of steel product)

100%

43%

6%

94 Mt

41 Mt

6 Mt

Introduction (1/2) 3

1. Steel is a carbon intensive material.

Japanese steel industry emitted a 187 Mt of CO2 in 2016, accounting for a

17% of Japan's energy-related CO2 emissions.

If an unilateral carbon tax, 30 US$/tCO2, is adapted, steel production cost

could rise by 66 US$/t of steel (+11%).

2. Steel is a tradable commodity.

Japan directly exported 41 Mt of steel products in 2016.

3. The increase in production cost can lead to carbon leakage.

Elasticity is one of the key parameters for the significance of carbon leakage.

Introduction (2/2) 4

Japan’s steel products export to global in 2016

Flat-rolled71%

Semi-finished (Slab, etc) 11%

Long (Sections, etc) 7%

Tubes 2%

Others 9%

Heavy plate7%

Hot-rolled wide strip 32%

Cold-rolled wide strip 7%

Galvanized sheet 7%

Other flat-rolled

(Stainless, etc) 18%

Semi-finished (Slab, etc)

Long (Bars, etc)

Pipes and tubes

Others

Heavy plate

Hot-rolled wide strip

Cold-rolled wide strip

Galvanized sheet

Other flat-rolled

41 Mt

This study focuses on flat-rolled steel products as follows:

Analysis 1 Analysis 2

Flat-rolled steel products ✓ ✓

Heavy plate ✓

Hot-rolled wide strip ✓

・・・ ・・・

*1)http://www.retainingwallsteelql

d.com.au/products.php

*2)https://www.thyssenkrupp-

steel.com/en/products/heavy-

plate/heavy-plate-overview.html

*3)http://www.yogsunsteel.com/fl

at_products.php

*4)http://japanese.galvanized-

steelcoils.com/sale-5372291-

astm-a1008-din16723-

en10130-cold-rolled-steel-plate-

sheet-for-oil-drum.html

*5)https://en.wikipedia.org/wiki/Ho

t-dip_galvanization

*1

*2

*3

*4

*5

0

500

1,000

1,500

2005 2007 2009 2011 2013 2015

Un

it p

rice

(U

S$/t

)

Japan's Exports (FOB)

Japan's Import (CIF)

2017-10

0

10

20

30

2005 2007 2009 2011 2013 2015

Vo

lum

e (

Mt/

y)

Japan's Exports

Japan's Imports

2017

Analysis 1: Elasticity of substitution between Japan’s export and Japan’s import 5

Methodology

1. Previous work for estimating trade elasticity

Armington (1969): substitution between domestic and imported goods

Hoshino (2001): semi-conductor trade elasticity in Japan

2. Based on Hoshino (2001), Analysis 1 applies the following:

𝑙𝑛𝐽𝑎𝑝𝑎𝑛′𝑠 𝑒𝑥𝑝𝑜𝑟𝑡 𝑣𝑜𝑙. [t]

𝐽𝑎𝑝𝑎𝑛′𝑠 𝑖𝑚𝑝𝑜𝑟𝑡 𝑣𝑜𝑙. [t]= 𝑐 + 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 ∙ 𝑙𝑛

𝐽𝑎𝑝𝑎𝑛′𝑠 𝑒𝑥𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒 [US$/t]

𝐽𝑎𝑝𝑎𝑛′𝑠 𝑖𝑚𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒 [US$/t]+ 𝑔 ∙ 𝑦𝑒𝑎𝑟

Data Flat-rolled steel products(a) Volume (Mt/y) (b) Unit price (US$/t)

Ref) Ministry of Finance (2017): Trade statistics of Japan, http://www.customs.go.jp/toukei/info/index_e.htm

0

500

1,000

1,500

2005 2007 2009 2011 2013 2015

Un

it p

rice

(U

S$/t

)

Japan's Exports (FOB)

Japan's Imports (CIF)

2017

0

500

1,000

1,500

2005 2007 2009 2011 2013 2015

Un

it p

rice

(U

S$/t

)

Japan's Exports (FOB)

Japan's Imports (CIF)

2017

-5

0

5

10

15

2005 2007 2009 2011 2013 2015

Vo

lum

e (

Mt/

y)

Japan's Exports

Japan's Imports

2017

Analysis 1: Data (1/2) 6

Hot-rolled wide strip(a) Volume (Mt/y) (b) Unit price (US$/t)

Ref) Ministry of Finance (2017): Trade statistics of Japan, http://www.customs.go.jp/toukei/info/index_e.htm

Heavy plate

-1

0

1

2

3

4

2005 2007 2009 2011 2013 2015

Vo

lum

e (

Mt/

y)

Japan's Exports

Japan's Imports

2017

(a) Volume (Mt/y) (b) Unit price (US$/t)

*2

*3

0

500

1,000

1,500

2005 2007 2009 2011 2013 2015

Un

it p

rice

(U

S$/t

)

Japan's Exports (FOB)

Japan's Imports (CIF)

2017

0

500

1,000

1,500

2005 2007 2009 2011 2013 2015

Un

it p

rice

(U

S$/t

)

Japan's Exports (FOB)

Japan's Imports (CIF)

2017

-1

0

1

2

3

4

2005 2007 2009 2011 2013 2015

Vo

lum

e (

Mt/

y)

Japan's Exports

Japan's Imports

2017

-2

0

2

4

2005 2007 2009 2011 2013 2015

Vo

lum

e (

Mt/

y)

Japan's Exports

Japan's Imports

2017

Analysis 1: Data (2/2) 7

Galvanized sheet(a) Volume (Mt/y) (b) Unit price (US$/t)

Ref) Ministry of Finance (2017): Trade statistics of Japan, http://www.customs.go.jp/toukei/info/index_e.htm

Cold-rolled wide strip(a) Volume (Mt/y) (b) Unit price (US$/t)

*4

*5

Analysis 1: Regression results 8

[Monthly data basis]

12 years (Jan. 2005―Jan. 2017) 4 years (Jan. 2013―Jan. 2017)

elasticity g, time trend R2adj elasticity g, time trend R2adj

Flat-rolledsteel products -0.66** -1%/y 0.05 N/A

Heavyplate -1.18** -17**%/y 0.53 -1.83** -24**%/y 0.50

Hot-rolledwide strip -0.64** 7**%/y 0.59 N/A

Cold-rolledwide strip -0.99** -1%/y 0.13 N/A

Galvanizedsheet N/A -1.16** -23**%/y 0.50

Negative time trends imply that Japanese steel industry was losing market share.

Large elasticity implies that price competitiveness was very intensive.

Note) “N/A” means that we can’t observe statistically significant results.

* denotes significance level < 10%. ** denotes significance level < 5%.

Japan’s steel

makers

-5

0

5

10

15

2005 2007 2009 2011 2013 2015

Vo

lum

e (

Mt/

y)

Japan's Exports

Japan's Imports

2017

-1

0

1

2

3

4

2005 2007 2009 2011 2013 2015

Vo

lum

e (

Mt/

y)

Japan's Exports

Japan's Imports

2017

Analysis 1: Discussion 9

[Monthly data basis]12 years (Jan. 2005―Jan. 2017) 4 years (Jan. 2013―Jan. 2017)

elasticity g, time trend R2adj elasticity g, time trend R2adj

Hot-rolled wide strip -0.64** 7**%/y 0.59 N/A

Galvanized sheet N/A -1.16** -23**%/y 0.50

Galvanized

Sheet, GS

(Mt/y)

Hot-rolled

wide strip,

HRS (Mt/y)2000’ 2010’

Hot-rolled wide strip (Mt/y)

Thai car

companies

Japan’s steel

makers

GS

Thai car

companies

GS

Thai re-

rollers

HRS*3

*5

e.g., Toyota Motor Thailand

0

25

50

2001 2003 2005 2007 2009 2011 2013 2015

Vo

lum

e (

Mt/

y)

Japan's Exports

China's Exports

0

500

1,000

2001 2003 2005 2007 2009 2011 2013 2015

Un

it p

rice

(U

S$/t

)

Japan's Exports (FOB)

China's Exports (Benchmark)

Analysis 2: Elasticity of substitution between Japan’s export and China’s export 10

Methodology

Based on Hoshino (2001), Analysis 2 applies the following:

𝑙𝑛𝐽𝑎𝑝𝑎𝑛′𝑠 𝑒𝑥𝑝𝑜𝑟𝑡 𝑣𝑜𝑙. [t]

𝐶ℎ𝑖𝑛𝑎′𝑠 𝑒𝑥𝑝𝑜𝑟𝑡 𝑣𝑜𝑙. [t]= 𝑐 + 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 ∙ 𝑙𝑛

𝐽𝑎𝑝𝑎𝑛′𝑠 𝑒𝑥𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒 [US$/t]

𝐶ℎ𝑖𝑛𝑎′𝑠 𝑒𝑥𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒 [US$/t]+ 𝑔 ∙ 𝑦𝑒𝑎𝑟

DataFlat-rolled steel products

(a) Volume (Mt/y) (b) Unit price (US$/t)

Ref) World Steel Dynamics Inc. Steel Benchmarker (2017)

Analysis 2: Regression results 11

(Annual data basis)15 years (2001―2015)

elasticity g, time trend R2adj

Flat-rolled steel products -3.34** -11**%/y 0.87

Negative time trend implies that Japanese steel industry is losing share of global

market. Large elasticity implies that price competitiveness is very intensive.

Discussion

Combining the estimated elasticity (-3.34) and an unilateral carbon tax (30 US$/tCO2)

can lead to carbon leakage.

Japan China Total (net)

Flat-rolled steel production -4.2 Mt/y (-15%) 4.2 Mt/y (+9%) 0

CO2 emission -9.3 MtCO2/y 10.6 MtCO2/y 1.3 MtCO2/y

CO2 intensity of BF steel mill 2.2 tCO2/t 2.5 tCO2/t -

Note) Japanese steel production cost can rise by 66 US$/t of steel (+11%) based on

full cost pass-through rate of carbon cost. 2015 market condition basis.

Summary (1/2) 12

The results indicate large elasticity, which means that price competitiveness was

very intensive.

The results also indicate negative time trends, which means that Japan’s steel

industry was loosing their market share.

Analysis 1: Elasticity of substitution between Japan’s export and Japan’s import

• Galvanized sheet [Jan. 2013―Jan. 2017]

Elasticity: -1.16

• Hot-rolled wide strip [Jan. 2005―Jan. 2017]

Elasticity: -0.64

Note) This is consistent with active overseas production of Thai re-rollers and

Thai car companies (e.g., Toyota Motor Thailand).

Time trend: -23%/y

Time trend: 7%/y *3

*5

Summary (2/2) 13

Future work

Comparison with the European studies done on trade impacts of EU ETS

Explicit consideration of

1. Value-added steel (stainless steel, seamless pipe, etc.)

2. Overcapacity of steel production by region,

3. Time lag and cumulative effect, and

4. Multi-regional analysis.

Analysis 2: Elasticity of substitution between Japan’s export and China’s export

• Estimated time trend: -11%/y

• Estimated elasticity: -3.34

• Combining the estimated elasticity (-3.34) and an unilateral carbon tax (30

US$/tCO2) can lead to carbon leakage and net increase in global CO2 emissions

(1.3 MtCO2/y).

Ref) http://sumitomothailand.co.th/

Discussion on international steel trade 14

Elasticity and its determinants

• MER

• Transaction mode

Negotiation transaction

Selling at a store

• Product differentiation

Time trend and its determinants

• Overcapacity of steel

production, esp. in China

• Supply chain dynamics

Other factors (and error)

• Anti-dumping, safeguard, and

countervailing duties

General

1. Japan’s re-rollers tend to import hot-rolled

coil in order to keep the bargaining power

against domestic suppliers: NSSMC, JFE.

2. Thai car companies have been shifting

“galvanized sheet import from Japan” to

“galvanized sheet purchase from Thai re-

rollers.”

Example

3. Japan import low-

grade heavy plate,

such as flooring in

construction site.

0

1,000

2,000

3,000

2005

Q1

2006

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1

2015

Q1

2016

Q1

Un

it p

rice

(US$

/met

ric

ton

)

Japan's export price (FOB)

Japan's import price (CIF): Nominal

Japan's import price (CIF): Corrected

-0.5

0.0

0.5

1.0

1.5

2.0

2.520

05Q

1

2006

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1

2015

Q1

2016

Q1Vo

lum

e (m

illio

ns

of m

etri

c to

ns/

qu

arte

r)

Japan's exports

Japan's imports

Appendix: Other flat-rolled steel products 15

(a) Volume (Mt/y) (b) Unit price (US$/t)

Ref) http://sumitomothailand.co.th/

0

1000

2000

3000

0 25 50 75

Jap

an's

imp

ort

pri

ce (C

IF):

No

min

al(U

S$/m

etri

c to

n)

Japan's import volume (103 metric tons/month)

2013 2014

2015 2016

(a+b) Relationship between volume and nominal unit price (monthly)

Japan’s import volume and

nominal unit price of other flat-

rolled steel were fluctuated.

In order to avoid composite effect,

this study developed a corrected

price index based on price

trajectory of 14 steel products.