China’s steel exports are unlikely to rebound in early 2018 as tight supplies and robust domestic demand encourage steel mills to sell products in the domestic market instead.
Exports hit a record high of 112.4mn t in 2015, exceeding 100mn t for the first time. The increase came as domestic demand slumped amid a consensus view at the time that China’s steel demand had peaked, with output likely to fall over the next decade. Exports edged lower in 2016 to 108.46mn t.
But China’s shipments have fallen sharply this year, with January-November exports down by around 31pc from a year earlier to 69.83mn t.
The fall has relieved some political pressure on Beijing. The surge in Chinese exports in recent years sparked concerns from other producing countries, whose mills struggled to compete with cheaper Chinese imports. Complaints emerged from the EU, US, India, Vietnam and elsewhere, arguing that Chinese overcapacity could lead to a permanent glut of steel that would depress prices and send mills to losses across the world. The fears lead the G20 group of industrialised nations to set up a committee to tackle with the problem, despite Beijing’s claims that overcapacity is a global, rather than China-specific, issue.
Beijing leads the way But conditions have changed this year. The Chinese government has played a big role, helping drive the elimination of 115mn t/yr of crude steel capacity since last year and eliminating an additional 140mn t/yr of scrap-fed induction furnace steel capacity in the first half of 2017. This has help bring supply and demand much closer to balance. Steel demand, which had begun to recover in 2016 on the back of higher real estate sales, has risen further this year — boosting domestic prices and eroding the incentive to export.
Chinese steel mills and trading firms expect China’s exports to fall again next year, but by a much smaller extent than in 2017. It is unlikely that domestic prices will be able to maintain sharp gains for another year, which would allow exports to become more competitive. And there may be limits to how much further exports can decline. Some Chinese steel exporters have already cut shipment volumes by more than half year on year so far in 2017, and may be unwilling to lose any more of their key overseas markets. These companies are looking to devise strategies to maintain exports as an insurance against any future downturn in domestic demand.
Exports could fall by another 10pc next year, said the manager of a large steel trading firm. Beijing remains committed to its goal of reducing steel overcapacity and bringing Chinese demand and supply closer to equilibrium, and is not particularly concerned about exports, he added.
In the shorter term, exports are also likely to come under pressure because of a fall in Chinese steel production in the winter heating season from 15 November to 15 March. Environmental restrictions have been imposed on blast furnace operations in north and east China during the period.
Market shifts Market dynamics have also weighed on steel exports in recent months. Chinese exporters have been frustrated by widening bid-offer spreads in key Asia-Pacific markets such as Vietnam in the second half of this year. A large steel trading firm reported getting bids that were around $30/t lower than offers for rebar in Pakistan. Bids for rebar in Myanmar (Burma), among the largest markets for Chinese rebar, have been around $50/t lower than offers.
China’s high domestic prices have also allowed other suppliers, such as Russia, India, Turkey, Qatar and Iran, to make inroads into large Asian steel markets. China’s hot-rolled coil (HRC) exports to Vietnam have been sidelined since October, with Russia- and India-origin material gaining market share. Recent offers of Oman-origin rebar in Hong Kong have been $40/t below export offers from mainland steel producers. HRC offers from Indian producers have been around $10/t lower than Chinese export offers in Vietnam.
China’s steel prices are mostly set through fixed price negotiations between buyers and sellers, although mills and trading firms are becoming more open to using indexes to price exports. Argus in September launched daily fob China steel export prices for rebar and HRC, as well as finished steel indexes on a cfr Asean basis, to allow for wider sell side participation.
Long products under pressure The fall in China’s exports has been more pronounced for long products because of the shutdown of induction furnaces, which mostly produced rebar, as well as strong demand for construction steel from real estate and infrastructure projects. The biggest drop in long product exports this year has been for billet, followed by rebar. Wire rod exports have been less affected.
Long product exports are likely to fall further over the next five to six months as domestic demand remains stable while supplies are constrained by environmental restrictions. But Beijing’s efforts to rein in soaring new home prices and prevent an asset bubble in real estate are starting to have an impact by curbing investment and price growth in large cities. These developments could slow construction steel demand in the second half of 2018.
Flat product exports have been mostly stable in 2017, something that is unlikely to change next year. Manufacturing sector demand in China is stabilising, as the government focuses on the services and high-technology sectors in a bid to improve the quality of economic growth.