March 2, 2016 / 9:43 AM / 4 years ago

Protectionism overstated as threat to China steel exports: Russell

LAUNCESTON, Australia (Reuters) - One of the big questions surrounding China’s embattled steel sector is whether it can continue to ramp up exports or will protectionism around the globe curb one of the few bright spots for mills in the world’s largest producer.

A worker stands near a stainless steel product line at a factory in Dalian, Liaoning Province, China, February 29, 2016. REUTERS/China Daily

The current market consensus would seem to be leaning toward the view that China will battle to increase steel exports, and may experience declines as more countries put import taxes and other measures in place to protect their domestic industries from the Chinese juggernaut.

So far, India, the United States and Indonesia have imposed some increased duties on steel imports from China, and measures are under consideration in other jurisdictions, including the European Union (EU) and Australia.

The number of countries looking at measures against Chinese steel and the plethora of media reports on the issue have helped rally the view that China is unlikely to be able to build on last year’s 20 percent jump in exports of steel products.

China exported 112.4 million tonnes of steel product last year, customs data shows, or about 9.36 million tonnes per month on average. This means exports were more than North America’s entire output and some 10 times greater than Britain’s.

The first month of 2016 saw exports of 9.74 million tonnes, which was 5.3 percent lower than January last year, but still comfortably ahead of the 12-month average.

The expectation is that China’s exports will follow the pattern of January for the rest of the year, declining in year-on-year terms as global protectionism starts to gather momentum.

But there is also a counter argument that the measures likely to be implemented won’t make too much difference, as they are being imposed by countries that don’t actually buy that much steel from China.

A breakdown of China’s steel exports, compiled by ANZ Banking Group’s senior commodity strategist Daniel Hynes, shows the EU accounts for 4 percent of shipments, the same as India, while the United States takes 3 percent and Indonesia 5 percent.

By far the biggest customer for Chinese steel is South Korea, taking 12 percent, with Vietnam and the Philippines receiving 5 percent each, and Malaysia, Singapore and Africa taking 3 percent each.

What the numbers show is that China’s steel customers are diverse and not all are contemplating protectionist measures.

CHINESE STEEL WELCOME IN PLACES

In fact some, especially those with no or limited domestic steel industries, will be quite pleased to buy Chinese steel, as it means they have access to lower prices than traditional suppliers, and there is more competition in the market.

The risk to China’s steel exports has been overstated and producers are likely to be able to find replacement markets for volumes they may lose in countries that put taxes and duties in place, according to ANZ’s Hynes.

However, while China’s steel exports may not come down that significantly this year due to protectionist measures, it’s likely that shipments may not increase much either.

Assuming more taxes and duties are imposed in the countries currently mulling measures, it’s reasonable to assume some drop in volumes being shipped from China.

It’s also reasonable to assume that China will be able to find some replacement markets, but overall, given the surplus of steel globally, it’s likely to be a big stretch for Chinese mills to repeat the sort of export growth seen in 2015.

If China’s steel exports do hold around the 9-10 million tonne a month level, that will provide some support to the troubled sector, with as many as half of all Chinese producers making losses, according to the industry association.

But it’s not necessarily a good thing for the longer term for Chinese mills to have the lifeline of exports, as it may slow or stall the much-needed rationalization of the sector.

China produced about 803 million tonnes of steel in 2015, versus a record 823 million in 2014. The China Iron & Steel Association expects a further drop this year, with the industry eventually shrinking to around 600 million tonnes in the future.

China currently has at least 300 million tonnes of spare capacity, making it a priority to close older, loss-making mills and consolidate the industry.

However, if exports provide a glimmer of hope to under-pressure mills and domestic steel prices continue, or at least consolidate, their recent gains, the impetus to rationalize the sector loses momentum.

For China’s steel sector, exports have become something of a double-edged sword; they help in the short term but hinder the necessary pain of restructuring vital for long-term health.

Editing by Himani Sarkar

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