China is the world’s biggest steel producer, and it continues to plow ahead with its steel exports, which climbed 9.3% year over year in the first half of 2016, despite many trade cases pending against the nation.

However, Axiom’s Gordon Johnson writes that investors may be wondering where all that steel is actually going, considering China’s exports to North America, the European Union, and Latin America, which have the harshest tariffs on imported Chinese steel, saw a dramatic 35.5% drop off in the first half of the year.

The answer appears to lie in other Asian markets and the Middle East, which haven’t taken measures against Chinese steel imports:

Specifically, when looking deeper at the data, we notice strong growth in exports to Vietnam, Thailand, Saudi Arabia, and Indonesia; that is, when taking the y/y change in 1H16 steel exports from China, shipments to Vietnam were +45.8% (3.9Mmt annualized), while shipments to Thailand were +74.8% (3.1Mmt annualized), exports to Saudi Arabia were +102% (1.9Mmt annualized), and to Indonesia were +43.1% (1.7Mmt annualized).

Ergo, Johnson warns that this shows the futility of those who have tried to hold back the wave of Chinese steel:

Thus, even w/ a number of trade sanctions levied on Chinese steel products, given that only a small proportion of China’s total steel exports was destined for the nations that originated these tariffs, it appears increasingly likely, as we have warned, that protectionism will not stem the flow of China’s seaborne steel – of the 20 countries we analyzed, the grouped regions with the most tariffs (i.e., N. America, EU, & LatAm) made up just 7.5% of total markets globally that received China’s steel exports in ’15 and 9.0% in ‘14). And despite the gov’t’s commitment to cut steel capacity by ~43Mmt this yr. (a drop in the bucket when considering China’s apparent consumption in ’15 was ~703Mmt [i.e., production of ~803Mmt, less net exports of ~99.6Mmt], which we expect to decline this yr., yet capacity is still >1,200Mmt), given exports accounted for >14% of national production in 1H16, we believe the incentive to push for more drastic capacity cuts will remain “off the table” so long as exports remain high. While our conclusion suggests perpetuating oversupply in global steel mkts, on the other hand, we recognize the windfall for seaborne steel traders.

 

Source : barrons.com

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