COMMENT: If Chinese steel exports are falling, why are international prices not rising?

According to China’s General Administration of Customs, in July 2019 the East Asian country exported 5.57 million tonnes of steel, including both semi-finished and finished material. This was down year on year from 5.89 million tonnes in July 2018. And the year-to-date total of 39.97 million tonnes of finished steel exports was also down by 2.9% year on year.

It was not unusual that these year-on-year comparisons were negative. Similar annual comparisons were seen last year. And while the amount of the latest monthly decline has been indicated by other sources, which are perhaps less dependable, as being much larger, Fastmarkets calculates the difference to be around 5%.

The strength of China’s internal steel demand, its environmental commitments concerning new production, and the generally harsh export environment are leading to there being less Chinese steel available in non-Chinese markets. But that is nothing new.

So why, then, are steel prices outside of China so sluggish? The average of Fastmarkets’ assessments of the price for domestic hot-rolled coil (HRC) in the United States in July was down by 38% year-on-year, while the corresponding average prices for similar material in India and Northern Europe fell by 16% and 11% year-on-year respectively.

If cheap Chinese steel products are not the problem, whether they are “dumped” or not, then what is?

We think that some issues have newly emerged, and relate to fresh challenges in 2019, such as geo-political tensions and mounting predictions of a recession in the US following inverse yield curves and falling domestic house prices. But other problems have been around for longer.

Is this all down to overcapacity?
“Overcapacity” is a word that has been used extensively in recent years when encouraging the industry to curb production that is seen as both environmentally polluting and economically damaging. It is arguably one of the problems that endures.

But overcapacity is clearly ignored in booming markets. If it were always important, then it would be difficult to explain how steel prices and margins, at least in the “spot” markets we track, have risen so spectacularly in almost every region over the past few years.

Much of the capacity in China that was seen as surplus has been removed in the past three years. In fact, a good deal more has been removed than was suggested in China’s latest Five-Year Plan in 2015. According to Chinese authorities, capacity has been eliminated that was equivalent to those of Europe and the US combined.

Elsewhere, however, capacity has only increased.

Financial support has been provided to Chinese mills that are trying to curb a dependency on imports, and government support has been provided to those looking for “survival”, either to maintain working assets or to restart idled facilities.

It is hard to see how such a regionally dynamic, enormous, and nationally strategic industry will ever curb an overcapacity problem. At worst, overcapacity only ever exaggerates a market decline. At best, it limits the sustainability of excessive returns.

In other words, we do not believe that overcapacity will prevent a market recovery. Similarly, it did not cause the market decline. So it cannot really be blamed for much at all.

So where can blame be laid? In our opinion, sentiment is a much bigger cause of market problems, and as a business we are keen to limit the effects of sentiment by providing price-risk management tools and training.

In research, however, we try to challenge it, because we are here to properly explain markets and to predict markets, and therefore to support those who make rational decisions.

But are we any good at doing our job?
Fastmarkets’ completely independent APEX service collates and measures the accuracy of forecasts from multiple research houses, including our own.

According to APEX, Fastmarkets’ research division topped the ranking in 2018 for being forecaster of the year on steelmaking raw materials. This was defined by APEX, controversially, to include coking coal as well as iron ore. We also remained the only forecaster of base metal prices to be on the APEX leaderboard for five years running, from 2014 to 2018.

On steel, we approach our forecasts in a similar way, measuring the accuracy of our predictions one quarter in advance, and on 14 separate benchmarks we have managed an average accuracy rating of more than 95% for five straight quarters, from April 2018 to June 2019. Our record on stainless steel, albeit using fewer benchmarks, is even better.

On actual fundamental developments, we still think that Chinese export volumes will rise in 2019, despite the pattern seen in the first seven months.

In terms of the context, we calculate from the provisional trade data series (which is rarely subject to change) that exports have fallen by more than 3% so far this year, and that the negative trend is becoming more acute. July’s exports were down by 5% year on year.

But the three key factors that have caused the decline in exports will not retain their influence for long.

Chinese demand growth is slowing dramatically, and has already turned to negative figures for flat-rolled steel products, used primarily in manufacturing applications. For long steel products, more often used in construction activity, we predict that the recent building boom is coming to an end. And while exports of flat-rolled steel have risen this year, they have been offset by a dearth in long steel products because Chinese suppliers have had a stronger domestic market to satisfy.

Steelmakers can usually respond to weakening demand dynamics but in China, where almost 90% of steel production is integrated and inflexible, but this is not as easy as it is in other regions. With iron ore imports surging to record levels in July, even after port stocks began to revive, we believe that mills have little or no intention of curbing their production, which always rises in the second half of the year anyway.

We will review the results in January when we know the facts. In the meantime, do ask us if you have any doubts or an opinion you would like to share. Ultimately, we learn together – and that is always a lot of fun!

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