The Chinese steel exports that have supported the
rising country’s crude steel output when the domestic demand faltered in the
past, is once again likely to rebound this year.
After a fall of 30.6% in 2017, exports have continued
to fall by 8.1% to 69.5 million tonnes in 2018. This plunge in country’s export
volumes in 2017 and 2018 has largely been attributed to improved domestic
demand, the shutdown of illegal steel production, and increasing protectionist
measures by importing countries (due to ongoing Sino-China trade war).
Factors that are going to affect China’s steel demand,
production, and exports
While Chinese steel demand got a boost from a mini
stimulus in real estate and the strong global economy, according to the World
Steel Association (WSA), continued economic rebalancing efforts and toughening
environmental regulations resulted in a deceleration of Chinese steel demand
toward the end of 2018.
1. Lower capacity cuts target for 2019
China is expected to set a target of eliminating just 20 MnT of steel capacity
this year, after accomplishing its 2016-2020 target of 150 MnT by last year, on
top of removing around 140 MnT of illegal low-grade steel capacity in 2017. The
capacity reductions have played a key role in lifting profitability in the
steel sector since 2016.
However, capacity reductions are expected to play a
smaller role in reforming China’s steel sector going forward, with the
government focusing on shutting smaller steel mills, increasing the size of
mills through mergers and acquisitions, encouraging mills to shift capacity
away from population centres to coastal areas or even overseas locations, and
ensuring blast furnaces are better equipped with pollution control
technologies.
2. Not-so effective winter-production cut measures
Apart from this, China’s ongoing winter anti-pollution plan has allowed local
authorities to adopt output curbs based on regional emission levels. This
compares to blanket production cuts in 2017, when the government called on
steel mills to cut output by 30-50% across four Northern provinces during the
peak winter heating months from November-March. However, there have been
concerns that transferring the responsibility of production curbs to provincial
rather than central officials has weakened enforcement. As a result, Chinese
steel production volumes in November and December continued to increase by
17.3% and 13.5% year-on-year respectively. Steel prices also took a tumble towards
the end of the year amid concerns of a steel supply glut while construction
demand weakened in winter.
3. Retaliatory tariffs by three majors, U.S., EU, and
Canada
Ongoing U.S.-China trade tensions have also negatively impacted the steel
trade, especially as U.S. tariffs have a knock-on effect on other countries
which are steadily implementing retaliatory and safeguard measures. For example
in January 2019, the European Commission revealed that EU member countries had
approved final safeguard measures on steel in response to a surge in steel
imports, and the measures would be implemented by 4 February and extend to July
2021. In October 2018, Canada also imposed provisional safeguard measures on
steel imports until April 2019, prompted by complaints from Canada’s steel
industry that shipments of cheap steel were being diverted to Canada from the
U.S.
Why will exports rebound this year?
Amid the increased production and tepid domestic demand in the absence of any
government stimulus, Chinese steel exports may possibly see some rebound this
year especially to Asian countries. This is because while steel prices in China
have slipped amid concerns of a steel supply glut and weakening construction
demand, steel mills may still maintain output if they keep steel margins
positive by switching back to cheaper low grade ores, and away from the more
expensive higher grade ores and scrap usage.
This lower domestic demand could result in more surplus
steel available for overseas sales especially to Asian countries due to
safeguard measures imposed by three maU.S., Canada and Europe.
Source: Steel mint