July 18, 2018 / 1:03 AM / 4 months ago

RPT-COLUMN-As trade war escalates, China's steel exports are rising again: Andy Home

(Repeats without change. The opinions expressed here are those of the author, a columnist for Reuters)

* China steel exports: tmsnrt.rs/2JumqUT

* China’s production running at “record” levels

* Beijing’s war on smog will brake steel growth

By Andy Home

LONDON, July 17 (Reuters) - The European Commission will this week unveil its proposed provisional “safeguard” measures to limit steel imports in response to the imposition of 25 percent tariffs on steel imports by the United States.

The European Union fears that the U.S. tariff barrier will simply divert more steel into its marketplace. Others are equally concerned, with India also planning its own “safeguards”.

Such is the ripple effect of tariffs. Walls beget more walls.

As the steel trade war heats up, it’s easy to forget that this all started with China’s chronic over-production and resulting massive exports in the middle of the decade.

In 2015 China exported 112 million tonnes of steel products — more than the United States, Canada and Mexico’s combined production that year.

The export pace has slowed since then because of capacity closures and stronger internal demand in China.

But with Chinese steel production hitting fresh highs with each passing month and exports rising again, how worried should the rest of the world be?

Graphic on Chinese steel product exports:

tmsnrt.rs/2JumqUT

IT’S OFFICIAL

China produced 80.2 million tonnes of crude steel in June, according to the National Bureau of Statistics (NBS).

That was equivalent to 976 million tonnes on an annualised basis, the third straight month of what Beijing said were “record” annualised run rates.

China has closed about 150 million tonnes of steel production capacity over the past couple of years, but much of this was “illegal” capacity built and operating without the correct permits, meaning that none of this output was in the statistics bureau’s historical count.

We may never know how much steel China produced before the capacity closures. Even the Chinese authorities may never know.

June’s production, therefore, may or may not have been a record.

What we do know is that the removal of this supply stream, both heavily polluting and of dubious quality, has created the space into which China’s official sector is now expanding.

Collective capacity utilisation rates are rising, and with them profitability.

Chinese steel mills are making a profit margin of about 800 yuan ($119.50) per tonne of steel, according to research house CRU.

Margins at some mills in the north of the country are at more than 1,000 yuan per tonne, one of the highest on record, according to analysts at Huatai Futures.

Given the strength of steel output growth, it’s not entirely surprising that exports have started to rise as well, even with continued strong domestic demand.

Steel product exports have accelerated every month since January. June’s tally of 6.94 million tonnes was the highest monthly flow since July 2017, albeit significantly down from peak export periods in 2015 and 2016.

The weaker yuan may be acting as an accelerant, but the trend is clear. Furthermore, it’s a trend that is worrying policymakers in steel-producing countries around the world, with signs that China’s own steel demand drivers — infrastructure and construction — are slowing.

CRACKDOWN IMPACT?

China’s steel production numbers are somewhat surprising given the rolling environmental inspections taking pace across the country since President Xi Jinping’s promise of “blue skies” prompted Beijing to step up its war on smog.

The steel production chain has come under particular scrutiny with disruptive effect.

When the inspectors swoop on a particular location, all production facilities have to be closed until they are cleared to reopen.

In the case of Xuzhou, a city in Jiangsu province, the inspections lasted more than two months and some mills are still closed as they install cleaning equipment such as desulfurisation units.

Cities such as Tangshan, a steel production hub, have gone even further, mandating across-the-board production cuts until the end of August as they seek to lower particulate emissions.

Such measures, however, are localised affairs, each with its own characteristics. Sometimes it’s steel furnaces that are closed. In other cases, the it could be pig iron or sintering plants rather than steel production facilities.

Even when the entire steel production chain in one city is closed, the effect can be to spur others to lift capacity to fill the resulting supply gap.

Any net braking effect on national output is hard to discern. Witness the three consecutive months of record official production.

TIME LAG

That may change in November, however.

Last year steel producers in 26 of China’s most polluted cities had to cut production during the winter heating season from November to March.

Analysts at Jefferies estimated in February that Chinese steel output fell 5 percent year on year between November 2017 and January 2018 and by 14 percent relative to “normal” August-September levels in 2017. (“Rocky road on the path to the new normal”, Feb. 14, 2018)

This year the campaign will be expanded to 82 cities, many in top coal and steel production hubs.

That dramatically increases the potential hit on collective production and could be encouraging higher output now as individual producers maximise those fat margins while they can.

Moreover, the new 2018-20 environmental action plan goes further by targeting more cities and more provinces for strict limits on steel capacity.

Steel capacity in Hebei, the country’s largest steel production province, will be capped at 200 million tonnes in 2020, compared with 286 million tonnes in 2013.

As with all such edicts in China, there will be slippage as steel producers, often with the approval of regional authorities, resist pressure to close or curtail production.

But it has become clear that the war on smog is still being ramped up and will have a braking impact on the amount of steel produced in China and on the scale of the country’s exports.

It will be too late to stop the steel trade wars, which have only just begun. But Beijing’s war on pollution will determine how long they last.

Editing by David Goodman

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