US economy

China’s steel export woes go beyond Trump


The world’s biggest steel exporter is in retreat.

Chinese mills are struggling to compete with aggressive pricing from the likes of Japan, against a backdrop of rising protectionism and slowing global economic growth.

A formal truce in the US-China trade war may not be enough to assuage the industry’s gloom. Even if Washington and Beijing manage to sign a deal next month that stops tariffs rising further, punitive US actions taken against Chinese steel and manufactured goods are likely to remain in place.

“As well as the tariffs, we’re facing problems like high prices in China, fierce global competition and weakening demand worldwide,” said an export director at a steel mill in Tangshan, the steelmaking hub of northern China.

Global giant

China retains an unassailable global market share — it shipped nearly 70m tonnes of finished or semi-finished steel last year, nearly double the amount sold by Japan, the world’s second-biggest exporter.

Chart of exports of finished and semi-finished steel that shows Chinese steel exporters are in retreat

The Chinese steel industry’s heft continues to fuel tensions in the global trading system, with accusations that mills receive unfair government support and that huge overproduction has resulted in widespread dumping in overseas markets. China’s 930m tonnes of output last year was more than half the 1.8bn tonnes produced worldwide (in 2001, when China joined the World Trade Organization, its production accounted for 18 per cent of the world total).

Chart of total production of crude steel that shows Chinese steel swamps the world

One of Donald Trump’s first actions in office was to impose a 25 per cent tariff on steel shipped into the US. Product from everywhere was hit because the US government wanted to capture Chinese steel that was being rerouted to other countries for processing, before being shipped to the US. The European Commission this month imposed tariffs on China-made steel wheels and has begun an anti-dumping investigation into imports of hot-rolled coil.

Trade actions are taking their toll. Last year’s gross steel exports from China were equivalent to just 7.5 per cent of total output, compared with nearly 14 per cent in 2015, when the government began a clean-up of the industry under its supply-side structural reform policy. Steel exports fell 8 per cent in 2018, while government data show them down another 5.3 per cent in the first nine months of this year, as US tariffs took their toll.

A Vietnam-based trader estimated Chinese steel now needed to be $5 to $10 cheaper per tonne than that from India, to offset the tariffs imposed on India targeting steel shipped from China for processing.

Tariffs on manufactured goods are also eating at demand, said Wang Guoqing, research director at Lange Steel Information Research Center, a Beijing-based consultancy. She noted that Chinese exports of industrial boilers were down 20.5 per cent by volume in the first eight months of this year, while car exports had fallen 12.5 per cent.

“The tariffs have had a negative impact on overall demand for Chinese steel,” Ms Wang said.

Mr Trump’s much-hyped “phase one” trade deal with China has been greeted with widespread scepticism. Steel traders in China worry specifically that, regardless of the outcome of bilateral negotiations, the tariffs imposed since last year will remain in place, while the hit to global activity cannot be reversed.

For these reasons, a formal agreement to ease trade tensions may help the steel industry catch its breath, “but it will not be easy for Chinese steel exports to recover once the damage has been done”, said the Tangshan-based trader.

Growing global competition

Slowing global activity has resulted in a fall in world steel prices, increasing the competition facing Chinese exporters. Since August, Japanese mills have been pricing their product at or below Chinese prices, while Indian suppliers are also eating into China’s market share.

Chinese mills were offering hot-rolled coil for as little as $450 a tonne on a free-on-board basis around the start of October but Japanese competitors were selling the same steel at the same grade for $435, luring buyers in Vietnam, which is the second-biggest market for Chinese steel after South Korea.

“My Vietnamese customers aren’t making inquiries nowadays because Chinese prices have lost competitiveness,” said a trader based in Zhejiang province on China’s east coast.

In contrast to global gloom, domestic prices have been supported by efforts to boost infrastructure investment. Domestic prices have come down since last year but would be lower still without policy support. Hot-rolled coil was last quoted at Rmb3,287 ($463) per tonne while rebar was at Rmb3,291 compared with more than Rmb4,000 a year ago.

Chart of steel bar and hot-rolled coil prices that shows they are off their highest point but are holding up

Bond issuance by local authorities has been fast-tracked to counter the economic drag, while infrastructure investment and a resilient real estate market are helping offset a slump in traditional sources of demand such as autos and shipmaking.

“It’s risky to rely heavily on infrastructure, but it really can help — it’s not that infrastructure will save the economy, but at least it will help keep growth steady as the global economy loses momentum,” said Zheng Peng, a trader at Jiangsu Xiangshi Trading.

Although crude steel output increased 9 per cent in the first eight months to 665m tonnes, inventories have not risen in tandem, said Ms Wang at Lange. Chinese crude steel inventories fell 724,000 tonnes to 9.76m tonnes between September 20 and 27, the week before the Golden Week holiday.

Chart of year-on-year change in monthly crude steel output versus weekly inventories that shows output in China has been rising but inventories have not

“That means, even if exports have been declining, domestic demand has been enough to offset the increasing output,” said Ms Wang.

Although prices have held up, they are expected to weaken as supply catches up with demand and as exporters try to sell at least some of their excess in the domestic market. As they adjust to the export downturn, steel industry participants are waiting for price declines that could last through next year. Industry profits are already dropping sharply — they were down 32 per cent in the first eight months — putting pressure on mills to increase output.

“Mills have to keep running if they want to get more loans and bolster funding chains — besides, you only accelerate production if you expect prices to drop further,” said the Tangshan-based trader. “Winter is coming — the only question is how long it lasts.”

scoutAsia is a corporate data and news service from Nikkei and the FT, providing in-depth information about more than 660,000 companies across more than 20 countries in east Asia, south Asia and Asean. This exclusive scoutAsia Research content has been produced by FT Confidential Research



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