A growing imbalance in Japan’s steel trade

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Total iron and steel exports in the first seven months of 2013 reached 26.01 million tonnes, implying an annualized figure of 44.59 million tonnes. This marks the third consecutive year of rises and a massive 36.8% increase on 2005’s ten-year low of 32.60 million tonnes.

An examination of the export figures over the past decade reveals some interesting trends: the remarkable ability of Japan’s steel companies to ramp up exports even during times of global economic crisis, increasing signs of excess capacity in global steel production and a steadily strengthening currency that would normally suggest reduced competitiveness.

Between 2004 and 2009, Japan’s iron and steel exports stayed under 40 million tonnes, reaching a high of 38.13 million tonnes in 2008 and a low of 32.60 million tonnes in 2005.

But since 2010, exports have never fallen below 40 million tonnes, ranging from a low of 41.23 million tonnes in 2011 to a projected high of 44.59 million tonnes this year.

Industry observers put the rising tide of exports down to a number of factors, including more investment by Japanese mills in downstream steel production, a shift to overseas production by major clients such as automakers and electrical appliance manufacturers, and the fact that regional producers are unable to match Japanese production of high-grade steel.

There has also been a desperate need to find alternative markets amid poor domestic demand. Between 2004 and 2008, exports accounted for less than 20% of crude steel output. However, as domestic demand continued to slump and mills ramped up exports, overseas shipments increased steadily from 2010 and are likely to account for nearly 27% this year.

On the other hand, imports of iron and steel are expected to sink to their lowest level in nine years at 7.21 million tonnes.
With growing levels of excess capacity in the region, one might have been tempted to think that the recovery in the Japanese economy – one of the few in the region – would make it an attractive export destination for regional producers. However, Japan’s mills have been saved by one major factor: the decline of the Yen, which makes imports more expensive.

Currency fluctuations should not be ignored: in 2011 and 2012 when the Yen peaked in strength against the dollar, cheap imports soared to their highest levels since before the 2008 financial crisis, despite the poor state of demand, while exports fumbled.

The rise in exports and the fall in imports has lead to a growing steel trade imbalance: between 2004 and 2008, the gap between exports and imports was never more than 30 million tonnes, and just 24.16 million tonnes in 2005.

But since 2010, it has never been below 30 million tonnes and this year will hit a record high of 37.38 million tonnes, a rise of almost 55% since 2005.

This growing imbalance has led to growing trade friction between Japan and other regional majors such as Korea and China who are facing long-term oversupply issues in their domestic markets and therefore also becoming increasingly reliant on exports.

It is therefore little coincidence that there has been a spike in anti-dumping measures – both actual and threatened – by these two countries against Japanese exports, and steel officials are privately conceding that however unfounded such accusations might be, they need to tread carefully.

Luckily, with domestic demand rapidly improving, they have a way to remedy the situation.