Chinese Steel Exports may Rebound amid Flat Domestic Demand Forecasts

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.