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RPT-COLUMN-Will shrinking Chinese steel exports disarm Trump's trade guns? Andy Home
October 23, 2017 / 1:00 AM / a month ago

RPT-COLUMN-Will shrinking Chinese steel exports disarm Trump's trade guns? Andy Home

(Repeats Oct 20 column without change. The opinions expressed here are those of the author, a columnist for Reuters))

* Chinese steel exports: tmsnrt.rs/2l1FIdo

* Steel production and real estate: tmsnrt.rs/2xTtycv

By Andy Home

LONDON, Oct 20 (Reuters) - So what’s become of the United States’ national security investigation into steel imports?

Launched in April of this year, the so-called “Section 232” investigation has since gone very quiet. “Under the final stages of review,” a Trump administration official told Reuters two months ago.

Delays may be to fine-tune any sanctions to minimise collateral damage to “friendly” trading partners while focusing on China. Exports from the world’s largest producer had risen, according to Commerce Secretary Wilbur Ross, “despite repeated Chinese claims that they were going to reduce their steel capacity”.

But what if they now have done so?

Chinese exports of steel products were 5.1 million tonnes in September, the lowest monthly total since February 2014. Exports over the first nine months of the year slumped by almost 30 percent to 60 million tonnes.

The 25 million tonne drop year on year is equivalent to closing every steel mill in Italy, Europe’s second-largest producer behind Germany.

This sharp shift in trade flows may have taken some of the sting out the global political heat generated by Chinese steel “dumping”.

But Beijing’s steel policy isn’t only about good politics. It’s also about good economics, transforming an unruly monster of a sector into a sustainable, profitable industry.

Policymakers are using both demand and supply levers to tame the country’s excess steel capacity.

If Beijing succeeds, it could herald a new global steel age, because what’s good for the world’s largest producer has to be good for everyone else, too. Even the United States.

Graphic on China's steel exports: tmsnrt.rs/2l1FIdo

Graphic on output versus real estate investment:

tmsnrt.rs/2xTtycv

PUMPING THE DEMAND ENGINES

China’s steel exports boomed to more than 100 million tonnes in 2015 and kept up the pace through most of last year.

The surge coincided with Chinese policymakers attempting to shift economic growth away from older smoke-stack industries such as steel towards services and higher-margin tech sectors.

China’s steel sector cut production in the face of falling demand, the first time it had done so in years, but increasing amounts of surplus steel still flooded into the global market.

Then, at the start of 2016, Beijing switched policy back to growth mode, refiring the old economic engines of construction and infrastructure. They are still running, albeit a little more slowly in the past couple of months.

Steel prices boomed, as did those of iron ore, once again catching that market by surprise.

Steel mills ramped up production to capture margins and repair the balance-sheet damage from the previous downturn.

They are still doing so.

China is exporting less steel because its own producers are making such good money supplying a buoyant domestic market.

SHRINKING SUPPLY

That’s the producers that are still in business, of course, because the other profitability lever being used by Beijing is supply.

Having promised capacity cuts to G20 leaders, China has been axeing a lot of capacity.

First to go were the induction furnace operations, many operating without official licence and all too often associated with sub-standard construction steel. All these plants were physically dismantled well ahead of the June deadline.

Some 110 million tonnes of such capacity has been closed, according to Chris Houlden, research manager at commodities research house CRU. (Insight: “Chinese Steel: On the brink of structural profitability”, Sept. 20, 2017).

Closures of blast and electric arc furnace (EAF) operators are ongoing. They totalled 68 million tonnes of capacity in 2015 and 2016, and this year’s 50 million tonne target “is likely to be achieved”.

CRU also thinks that the 2020 target for 170 million tonnes of blast and EAF closures will “largely be met”, citing stepped-up inspections, harsher enforcement and public engagement.

At which stage China will have cut nearly 300 million tonnes of capacity.

Don’t expect these cuts to show up in official production figures, by the way. Much of what is being closed was “unofficial” and never counted in the first place.

China’s steel production was up almost 6 percent in the first eight months of 2017, but much of that increase will have simply replaced the so-called dark production that has now been closed.

As excess supply is pushed out of the market, utilisation rates are rising.

CRU estimates that capacity utilisation in China will jump 8.4 percentage points this year to 84.7 percent, on the brink of the 85 percentage point threshold of sustainable profitability.

To put that in perspective, the World Steel Association assessed capacity utilisation across its 67 members, including China, at 72.2 percent in August.

If a demand boost generated a much-needed cash injection for China’s steel sector, reforms on the supply side seem to be reshaping its future profitability potential.

GOOD NEWS, BUT WINTER IS COMING

Lower Chinese exports are good news for the rest of the world’s producers, particularly given a benign global steel demand picture.

Production outside of China has been rising, up 4.2 percent in January-August this year, according to WorldSteel. U.S. steel output has risen by 2.4 percent.

Higher Chinese pricing, with construction-grade rebar still hovering near five-year highs, has been transmitted into international prices.

Is this a sign of things to come?

CRU certainly thinks so. “We expect exports from China to fall to 60-70 million tonnes a year and these exports will be priced higher relative to costs, benefiting steelmakers everywhere,” it said in a report.

Before we get there, however, comes the third part of Beijing’s supply-side package for its steel producers.

Dove-tailing with the economic and political rationale of taming its steel sector is the pressing need to curb output on environmental grounds.

The new winter heating season directives will force all sorts of industrial producers, including steel, to curb capacity in the area around Beijing between November and March to eliminate the city’s notorious smog.

Some cities, such as Tangshan, have ordered even earlier closures.

There is much uncertainty over how much production will be affected if producers outside of the affected area lift output.

Critical will be the impact on profit margins.

If they hold up, exports will stay low. If not, we might be hearing more about that Section 232 investigation.

But for now it’s looking a lot less urgent than it did at the start of this year.

Editing by David Goodman

Our Standards:The Thomson Reuters Trust Principles.
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