China steel exports
We’ve seen the problems facing China’s steel industry and the impacts on the global steel markets. Now, we’ll look at the possible reasons behind the massive steel exports from China.
Lower capacity utilization
We saw previously that there’s low capacity utilization in the steel industry globally. The chart above shows the surplus in major steel consuming countries. You can define “surplus” as the difference between steel production and consumption.
As you can see, China has the largest surplus among major economies. Chinese companies have an incentive to run the plants at higher capacities, as it reduces their production costs. This cheap steel then finds its way into the international markets.
Lower Chinese steel prices
One of the key factors for increasing steel exports from China has been the difference in steel prices in China and other countries. Analysts attribute this price differential to the support from the Chinese government. This support is in the form of cheaper credit and export subsidies.
Many analysts believe the Chinese currency is undervalued to its fair value. This undervaluation makes Chinese products cheaper compared to other nations.
These cheap imports have been a major bone of contention between China and its trading partners. China hasn’t been alone in exporting steel to tide over the slowdown in its domestic market. There have been complaints of dumping against other countries as well.
U.S. steel producers filed 40 anti-dumping and countervailing duty petitions in 2013 and the first two months of 2014, the largest volume of trade cases in steel since 2001. Recently, the International Trade Commission ratified the U.S. Department of Commerce’s anti-dumping duty. This was a positive development for steel companies like ArcelorMittal (MT), United States Steel (X), AK Steel (AKS), Nucor (NUE), and Steel Dynamics (STLD). These companies form the investment universe for ETFs like the SPDR S&P Metals and Mining ETF (XME).
Next, we’ll look at the steps taken by the Chinese government to address the excess steel capacity problem.