China’s steel export juggernaut has decelerated, with the country’s innumerable steelmakers focusing on local demand and lapping up domestic margins that have perhaps never been stronger.
The result of this increased focus on internal demand has meant relief for steelmaking nations that, prior to 2014, were price makers globally and in their own regions.
Turkey is becoming a regional bellwether once more for long products; Russia can set the tone again in the Baltic and Black Seas for flats and semi-finished products. Closer to China, Japan and South Korea’s exporting mills should be feeling more relaxed in regional export — and domestic sales — negotiations now.
In the last couple of years, these export-oriented steel markets had become, if not passive observers, then certainly unwilling dependents to China’s export locomotive. In a market based on relationships and familiar connections, regional trade had been more naturally the norm, but this was thoroughly disrupted in the last two years.
Since China’s domestic market started to surge — a process that truly began post-Chinese New Year in March, conditions globally for other exporting nations have returned to pre-2014 norms, albeit with some scars.
Black Sea export prices for billet, slab and HRC — many of which originate in Russia — have increased by $113-167.50/mt from the end of February to April 22. In EMEA, Russia is most likely to benefit from China’s absence thanks to low production costs and considerable local raw material reserves.
Turkey’s exports in Q1 rose 3.2% to 4.3 million mt; sales to North Africa surged 135%, reaching 878,000 mt. Meanwhile, sales to the EU jumped 42% to reach 748,000 mt. Erdemir Group, the only listed large steelmaker in Turkey, reported an 86% rise in exports of flat-rolled steel in Q1, with EU-bound sales quadrupling on year to 127,000 mt.
These markets had become export areas China penetrated in the last two years. Italy, for example, imported over one million mt of hot-rolled coil from China last year, 202% more than in 2014. Italy, Spain and Belgium alone accounted for 12% of China’s plate exports.
The most surprising fact from last year’s trade activity was that only two from the top-five importers of China-origin steel are South-East and East Asian nations. Compare this to three years ago, when ASEAN nations accounted for the bulk of China export activity and the transformation is staggering.
All of this made a mockery of a long-held belief that, even though China produces more than half the world’s production, Chinese producers make steel for their home market. One seasoned trader (who I won’t name, because hindsight is 20/20 after all), vehemently affirmed at a conference a couple of years ago that, “China’s steelmakers have no interest in exporting steel.”
But, perhaps on analyzing that statement there is a certain sense to it. Taking Wuhan Steel as an example — a 15-plus million mt producer in China, the company recently announced profits of Yuan 30.3 million ($4.7 million) in Q1, having lost Yuan 7.6 billion in 2015. This pattern of a Q1 return to profits is visible across many of China’s largest steelmakers.
It could be taken then that when China’s mills export in excess of 100 million mt/year, this does not translate as a healthy steel market.
But for how long?
The question is: how long is this process likely to last? The answer could well be: not long. China’s current surge in local steel pricing has been spurred, many believe, by a refreshed credit binge — hitting the boost button for consumption, and creating an environment for eye-watering steelmaking margins.
Margins of Yuan 600-800/mt in China are pretty much unheard of, and have unsurprisingly prompted a surge in output. China’s producer’s association is warning of over-heating. For the latest available figures, output increased 3.4% in the first decade of April compared to the last of March. More revealingly, non-CISA mills also ramped up output considerably more.
So far this swell in production has not troubled stock levels in China, which have actually decreased, but the market is jittery: two large drops (of more than Yuan 100/mt) in the much-observed Tangshan billet price in the last few days jolted markets.
Indeed, Q1 steel exports from China actually increased, despite improving domestic sentiment through the quarter. On an annualized basis, Q1 exports were over 100 million mt. This was especially remarkable given the encroachment of anti-dumping duties on international trade, and goes some way to confirming Macquarie’s assertion that Chinese exports are likely to be above the 100 million mt mark until 2020.