Global steel prices have come a long way from their 1Q16 lows. While several factors including a favorable global demand environment supported steel prices (MT), the real boost came from China. China has been blamed for the global steel industry’s mess. It has taken steps to address its overcapacity problem. Along with shutting down some of its illegal capacity, China is curtailing steel production in some provinces during the winter months.
November is the first month that China’s mandated production cuts have come into effect. China’s steel production fell from 72.3 million metric tons in October to 66.15 million metric tons in November. Although production has fallen sharply on a month-over-month basis, it’s similar to the same month last year.
Chinese steel exports
Despite a sharp yearly increase in steel production this year, Chinese steel exports have been subdued due to strong domestic demand. In the first 11 months of 2017, China exported ~70 million metric tons of steel—30.8% lower than the same period last year.
Meanwhile, 2018 could be a different ballgame for the Chinese steel industry. This year, strong demand from the construction sector boosted domestic steel demand. In the past few months, we’ve seen some moderation in Chinese demand indicators. To make things worse, according to a Reuters report citing China’s Ministry of Finance, the country “will cut export taxes on some steel products” from the next year.
Moderation in domestic demand combined with the cut in export taxes could propel Chinese steel mills to export their excess produce. It could hamper the global steel industry’s nascent recovery. While the US steel industry (XME) is largely immune from direct Chinese exports in most categories, the Chinese steel industry’s dynamics could impact US steel stocks like U.S. Steel Corporation (X), AK Steel (AKS), and Nucor (NUE) in 2018.
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