Credit Suisse Sees ‘Extraordinary Levels’ of China Steel Exports

28 July 2015

Steel exports from China have increased to extraordinary levels as demand in the world’s largest producer slows, Credit Suisse Group AG said, as the head of India’s third-biggest mill decried the impact of surging competition.

Overseas sales from China rose to 52.4 million metric tons in the first half, in line with Japan’s total crude-steel production of 52.6 million tons for the period, Credit Suisse analyst Shinya Yamada said in a report. As export growth continues, trade frictions could escalate, Yamada wrote.

Mills in China confronting slower domestic demand for the first time in a generation are boosting exports, increasing competition in markets across Asia, Europe and the U.S. Chinese steelmakers are the linchpin of the global industry, accounting for about half of production. The global steel industry is reeling under the impact of exports from China, Sajjan Jindal, chairman of India’s JSW Steel Ltd., told shareholders Tuesday.

“Chinese steel exports have attained near parity with Japan’s total output” in the first six months of 2015, Yamada said in the July 27 report. “Considering Japan’s crude-steel output is second only to China’s, this implies that Chinese exports have risen to extraordinary levels.”

The unprecedented surge in imports is hurting the local producers, JSW’s Jindal said, according to a copy of his remarks at the company’s annual general meeting. While the cheap imports may benefit users in the short term, surely reliance on imports can’t be a sustainable business strategy, Jindal said.

Pushing Back

There are increasing signs mills outside China may be pushing back. U.S. Steel Corp. and ArcelorMittal are among group of producers in the U.S. that filed a case against imports of cold-rolled steel, according to a person briefed on matter. The case, filed Monday with the U.S. International Trade Commission, includes steel from China as well as other countries.

ArcelorMittal South Africa Ltd. said last week that it’s going to fight steel from China, which is being sent to ports at prices as much as 25 percent below local output costs, according to the country’s largest maker. The unit of ArcelorMittal wants the government to increase tariffs.

There were eight trade probes on Chinese steel products in the first half, while a further five were added in July, according the China Iron & Steel Association. Trade conflicts hurt China’s reputation in the global market and the interests of Chinese steelmakers, the group said in a statement on its website that confirmed local consumption was shrinking.

Demand for steel per head in China may emulate the trend seen in postwar Japan, which peaked in 1973, then fell, according to Yamada. Once demand peaks, it’s necessary to either step up exports or scrap surplus facilities, he said.

Prices in China of steel rebar, a benchmark product used in construction, sank to the lowest level since 2003 this month because of the slowdown in local demand. That’s hurting mills’ profit margins, increasing the incentive to seek sales overseas.

“Falling steel prices have sent profit margins among Chinese steel mills well into negative territory,” Goldman Sachs Group Inc. said on Monday. “Unless domestic steel consumption reaches an inflection point and stops contracting during the third quarter, sentiment is likely to remain poor.”