Elasticity of Substitution Junichiro Oda*, Takashi Homma, Keigo - - PowerPoint PPT Presentation

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Elasticity of Substitution Junichiro Oda*, Takashi Homma, Keigo - - PowerPoint PPT Presentation

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The 15th IAEE European Conference 2017 September 3-6, 2017 Hofburg Congress Center, Vienna, Austria Estimation of Japanese Steel Product Trade Elasticity of Substitution Junichiro Oda*, Takashi Homma, Keigo Akimoto Research Institute of

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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

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  • 1

1 2 3 4 2005 2007 2009 2011 2013 2015

Volume (Mt/y)

Japan's Exports Japan's Imports 2017 25 50 2001 2003 2005 2007 2009 2011 2013 2015 Volume (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

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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.

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Introduction (2/2)

4

Japan’s steel products export to global in 2016

Flat-rolled 71%

Semi-finished (Slab, etc) 11% Long (Sections, etc) 7% Tubes 2% Others 9%

Heavy plate 7% Hot-rolled wide strip 32% Cold-rolled wide strip 7% Galvanized sheet 7% Other flat- rolled (Stainless, etc) 18% 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

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500 1,000 1,500

2005 2007 2009 2011 2013 2015

Unit price (US$/t)

Japan's Exports (FOB) Japan's Import (CIF) 2017

  • 10

10 20 30 2005 2007 2009 2011 2013 2015

Volume (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:

𝑚𝑜

𝐾𝑏𝑞𝑏𝑜′𝑡 𝑓𝑦𝑞𝑝𝑠𝑢 𝑤𝑝𝑚. [t] 𝐾𝑏𝑞𝑏𝑜′𝑡 𝑗𝑛𝑞𝑝𝑠𝑢 𝑤𝑝𝑚. [t] = 𝑑 + 𝑓𝑚𝑏𝑡𝑢𝑗𝑑𝑗𝑢𝑧 ∙ 𝑚𝑜 𝐾𝑏𝑞𝑏𝑜′𝑡 𝑓𝑦𝑞𝑝𝑠𝑢 𝑞𝑠𝑗𝑑𝑓 [US$/t] 𝐾𝑏𝑞𝑏𝑜′𝑡 𝑗𝑛𝑞𝑝𝑠𝑢 𝑞𝑠𝑗𝑑𝑓 [US$/t] + 𝑕 ∙ 𝑧𝑓𝑏𝑠

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

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500 1,000 1,500

2005 2007 2009 2011 2013 2015

Unit price (US$/t)

Japan's Exports (FOB) Japan's Imports (CIF) 2017

500 1,000 1,500

2005 2007 2009 2011 2013 2015

Unit price (US$/t)

Japan's Exports (FOB) Japan's Imports (CIF) 2017

  • 5

5 10 15 2005 2007 2009 2011 2013 2015

Volume (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

1 2 3 4 2005 2007 2009 2011 2013 2015

Volume (Mt/y)

Japan's Exports Japan's Imports 2017

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

*2 *3

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500 1,000 1,500

2005 2007 2009 2011 2013 2015

Unit price (US$/t)

Japan's Exports (FOB) Japan's Imports (CIF) 2017

500 1,000 1,500

2005 2007 2009 2011 2013 2015

Unit price (US$/t)

Japan's Exports (FOB) Japan's Imports (CIF) 2017

  • 1

1 2 3 4 2005 2007 2009 2011 2013 2015

Volume (Mt/y)

Japan's Exports Japan's Imports 2017

  • 2

2 4 2005 2007 2009 2011 2013 2015

Volume (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

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Analysis 1: Regression results

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[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-rolled steel products

  • 0.66**
  • 1%/y

0.05 N/A Heavy plate

  • 1.18**
  • 17**%/y

0.53

  • 1.83**
  • 24**%/y

0.50 Hot-rolled wide strip

  • 0.64**

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

  • 0.99**
  • 1%/y

0.13 N/A Galvanized sheet 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%.

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Japan’s steel makers

  • 5

5 10 15 2005 2007 2009 2011 2013 2015

Volume (Mt/y)

Japan's Exports Japan's Imports 2017

  • 1

1 2 3 4 2005 2007 2009 2011 2013 2015

Volume (Mt/y)

Japan's Exports Japan's Imports 2017

Analysis 1: Discussion

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[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

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25 50 2001 2003 2005 2007 2009 2011 2013 2015 Volume (Mt/y) Japan's Exports China's Exports

500 1,000

2001 2003 2005 2007 2009 2011 2013 2015 Unit price (US$/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:

𝑚𝑜

𝐾𝑏𝑞𝑏𝑜′𝑡 𝑓𝑦𝑞𝑝𝑠𝑢 𝑤𝑝𝑚. [t] 𝐷ℎ𝑗𝑜𝑏′𝑡 𝑓𝑦𝑞𝑝𝑠𝑢 𝑤𝑝𝑚. [t]

= 𝑑 + 𝑓𝑚𝑏𝑡𝑢𝑗𝑑𝑗𝑢𝑧 ∙ 𝑚𝑜

𝐾𝑏𝑞𝑏𝑜′𝑡 𝑓𝑦𝑞𝑝𝑠𝑢 𝑞𝑠𝑗𝑑𝑓 [US$/t] 𝐷ℎ𝑗𝑜𝑏′𝑡 𝑓𝑦𝑞𝑝𝑠𝑢 𝑞𝑠𝑗𝑑𝑓 [US$/t] + 𝑕 ∙ 𝑧𝑓𝑏𝑠

Data Flat-rolled steel products

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

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

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Analysis 2: Regression results

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(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%) 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.

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Summary (1/2)

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 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

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Summary (2/2)

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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/

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Discussion on international steel trade

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 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.

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1,000 2,000 3,000 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 Unit price (US$/metric 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 2.5 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 Volume (millions of metric tons/quarter) 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/

1000 2000 3000 25 50 75 Japan's import price (CIF): Nominal (US$/metric ton) Japan's import volume (103metric 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.