12 Jul

China’s Steel Exports Fall, but Industry Woes Continue

WRITTEN BY Mohit Oberoi, CFA

China’s steel exports

On Friday, China released its June trade data, including its steel exports data. While China’s trade data is a key metric by which we can gauge the health of the world’s second-largest economy, it’s an even more crucial data point for metals and mining investors.

China is the world’s largest steel and aluminum consumer and exporter. The country’s surplus production has been blamed for the global steel industry’s woes.

China’s Steel Exports Fall, but Industry Woes Continue

China’s excess steel capacity and resultant steel exports have been a challenge for the global steel industry. The year 2015 was a peak period for China’s steel exports. China exported 112 million metric tons of steel products in 2015, which was more than Japan—the second-largest steel producer—produced in the entire year. Steel companies including U.S. Steel Corporation (X), AK Steel (AKS), Nucor (NUE), and Steel Dynamics (STLD) blamed burgeoning Chinese steel exports for the sharp fall in US steel prices. Incidentally, U.S. Steel and AK Steel idled some of their facilities as US steel prices plunged in the fourth quarter of 2015. Nucor and Steel Dynamics also adjusted their production plans as US spot hot rolled coil prices plunged below $400 per ton.

However, Chinese steel exports fell on a yearly basis for three years after 2015. Following rising pollution levels and a global backlash due to rising steel exports, China cut some of its excess steel capacity. Exports are now far below their 2015 highs. Last month, China exported 5.3 million metric tons of steel, a YoY (year-over-year) fall of 23.5%. China’s steel exports have fallen YoY in four out of the last six months. In the first half of 2019, China’s steel exports fell 3% compared to the corresponding period in 2018.

Steel stocks continue to sag

US steel stocks also have additional protection from Section 232 tariffs. However, despite Section 232 tariffs and falling Chinese steel exports, US steel stocks have sagged this year. In May, all leading US-based steel producers hit a 52-week low. Although stock prices bounced back in June, they’re still far below their price levels from March 2018, when President Donald Trump announced the Section 232 tariffs.

Where’s the problem?

While China’s steel overcapacity has been somewhat addressed, the global slowdown has taken a toll on steel prices. The US-China trade war hasn’t helped metals prices either. If we look at the domestic scenario, we’ll find that the US steel demand outlook has also been muted, with leading end consumers such as the construction and automotive sectors showing signs of moderation. The Section 232 exemption for Canada and Mexico further dented the US steel market sentiment. Canada and Mexico are the top two steel exporters to the US.

Given the sharp fall in US steel prices, steel stocks have also corrected. Over the last month, though, US steel companies have announced two rounds of price hikes. Read US Steel Companies Announce Price Hikes to explore whether these hikes will hold water in what’s still a weak market.

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