China distorts the global steel industry
Steel exports from China are expected to surpass 85 million tonnes (or Mt). This is up ~40% on a year-over-year basis. To put things into perspective, China’s steel exports are a tad short of annual steel production in the United States. Let’s see how China distorts the global steel industry.
Chinese steel is cheap
Steel products in China are cheaper than almost all other major economies. A slowdown in the demand for Chinese steel coupled with massive overcapacity are some of the prime reasons behind this. So what does China do with its excess steel? It’s simple. China exports it to other countries. The above chart shows the surge in China’s steel exports.
To find out more, you can read Why China became the global steel giant.
While the United States has imposed antidumping duties on several Chinese steel products, countries in Asia and Europe are still at the receiving end of Chinese steel. No wonder steel associations from India to Europe are urging their governments to take punitive action against Chinese imports.
Exports through other countries?
Cheap Chinese steel entering other countries has an impact on the domestic steel industry of those countries. One of the ways to maintain output while combating Chinese imports is to start exporting more steel.
US steel imports from countries such as the United Kingdom and Korea have increased multifold. The United States has preferential trade treaties with these countries. Korea is the top destination for Chinese steel imports. On the other hand, Korea is also the second biggest steel exporter to the United States.
According to some analysts, Korea uses a lot of Chinese steel to make tubular steel. Korea then exports to the United States. This is one way China distorts the global steel industry.
Imports of these tubular goods from Korea has a negative impact on steel companies such as U.S. Steel Corporation (X), ArcelorMittal (MT), AK Steel (AKS), and Nucor (NUE). These companies form the investment universe for the SPDR S&P Metals and Mining ETF (XME).
Next, let’s see how Chinese steel companies are taking advantage of loose government policies.