China steel export spike short-lived

Falling Chinese domestic steel demand will lead to capacity cuts and restructuring next year, according to a report from Moody’s Investor Services.

As profitability at Chinese steelmakers drops on the back of weak demand, excess steelmaking capacity will be forced out in an attempt to inject life back into the market.

The slowdown in demand is highlighting a worsening oversupply position, which has pushed Chinese steel prices to historic lows and made exporting more attractive.

Moody’s anticipates that Chinese domestic demand for steel will fall by 5% year-on-year over the next 12 months. Rising exports will partially offset loses but overall sales volumes will still fall 3%-4% by November 2016.

Chinese steel exports jumped 50% to 94 million tonnes in 2014 and continued to increase by 26% over the first eight months of 2015 as imports declined. However, this export growth has not been welcomed by all.

“Rising exports have increased trade frictions with other nations, which have placed restrictions on Chinese products that will likely constrain China’s export growth beyond 2016,” Moody’s said. It pointed to Korea’s recently imposed anti-dumping duty of up to 33% on H-beam products from China as evidence of this.

In the first eight months of 2015, Chinese apparent domestic steel demand, as measured by total output less net exports, declined 5%, versus a 2.1% drop in full-year 2014, according to China’s Iron & Steel Association and General Administration of Customs. The decline was mainly because of weak demand in most major end-markets such as real estate, infrastructure and auto.

“We expect steel demand to be sluggish because new investments in the building construction sector, which accounts for about 38% of Chinese steel demand, will remain weak in the next 12 months,” said Moody’s. “We expect a modest 0%-5% year-on-year growth in the value of nationwide property sales in 2016, reflecting a higher base of comparison in 2015 as the effect of the supportive monetary and regulatory policies implemented by the government is mostly reflected in year-to-date sales of 2015.”

The flipside

However, research from Morgan Stanley counters that recent central government policies on infrastructure-funding and pushing local governments to start projects on time will likely lead to stronger infrastructure demand in the remainder of 2015 and the first half of 2016.

If this materialises, the metals sector might see a long-awaited reversal of fortunes.

“Emerging markets and China in particular remain key to commodities demand,” says Menno Sanderse, Morgan Stanley’s European metals and mining equities analyst. “In the next few months we expect the perception around this demand to improve.”

China has accounted for between 84% and 122% of commodity consumption growth over the past 14 years and remains the main driver of growth in global commodities.

Focusing on kick-starting growth, China’s state banks have issued Yuan300bn ($47bn) in government bonds to support local infrastructure spending. This could, says Morgan Stanley, push commodities prices up by 14% in 2016 and 19% in 2017.

However, Morgan Stanley analysts caution not to expect ‘hockey-stick’ sector growth. “This is not a call for a fundamental change in the industry’s fortunes,” Mr Sanderse says. The sector still faces many risks from seasonal destocking efforts by metal processors, which boost supply and threaten prices, to continued concern about sluggish global growth and China’s ongoing transition to a consumer-based economy.”