China's steel exports drop in July on contracting demand

• Steel exports to South Asia, East Asia, Europe and Middle East drop sharply
  
  
• Sliding currencies, inflation make imports costlier
  
  
• Global seaborne steel trade volumes to be impacted by drop in Chinese steel exports
  
  

Morning Brief: With steel mills across the globe affecting production cuts in the face of diminished demand, China, the largest steel exporter, has been impacted negatively. Its total steel exports in July were at 6.64 million tonnes (mnt), a m-o-m drop of 12% against 7.52 mnt in June. Over January-July, 2022, volumes were down 7% to almost 40 mnt against 43 mnt in the same period in 2021.

It may be mentioned that China's steel exports have been falling m-o-m after rising to a record 7.76 mnt in May, 2022 during its Covid surge and global post-war panic buying.

Key regions see m-o-m drop in exports

Middle East & Africa: This region, in volume terms, showed the highest imports from China in July 2022, at 1.74 mnt. However, these were down 20% m-o-m from 2.18 mnt in June. Turkey's imports plunged 63% amid steep production cuts.

Southeast Asia: This geography more or less held steady at 1.68 mnt in steel exports in July - a dip of 1% m-o-m against 1.69 mnt in June. Southeast Asia has traditionally been a very large market for China but here too some prominent individual countries showed a sharp m-o-m drop. These were Vietnam (-14%), Thailand (-18%), and Malaysia (-27%).

East Asia: Volumes to East Asia (Japan, Korea, Taiwan) dropped the highest, by 25% m-o-m to 0.73 mnt. Exports to South Korea and Japan dropped a steep 23% and 35% respectively.

Europe: Exports to Europe dropped 19% m-o-m in July although China traditionally does not export in large volumes to this geography because of trade barriers.

South Asia: Volumes to this geography showed a sharp 21% drop to 0.33 mnt against 0.42 mnt in June. India and Pakistan showed a drop of 20% and Bangladesh, 23%.

Reasons for drop in China's exports

1. Demand drop, production cuts shrink procurements: Most countries globally are seeing a drop in demand, which has forced mills to opt for production cuts.

Except for India and Iran, all major countries have shown a drop in production in July 2022. China's own production was down 6.40%. Turkey's output dropped almost 21%, Russia's was down 13%, the US by 6.40%, Brazil's nearly 8% and Japan's about 9%. Overall, crude steel production in July, as per worldsteel, was down 6.5% to 149.3 mnt.

Vietnamese mills Formosa Ha Tin and Hoa Phat reduced their hot strip output due to subdued home demand. In Korea, POSCO planned maintenance of its hot rolling mill at its Gwangyang works in October. In Japan, Nippon Steel has opted for regular maintenance of its hot rolling mill at its Kyushu works.

In Europe and India too, mills opted for production cuts amid inflationary pressures, high energy prices and reduced home demand.

Consequently, demand from China also dropped in tandem.

2. Currency conundrum: Almost all currencies are sliding globally amid strong inflationary pressures. Most countries, especially in South Asia - India, Pakistan and Bangladesh - are grappling with this double whammy. While Indian end-users, amid subdued home demand and prices, turned to cheaper imports, Pakistan is struggling with a sliding currency, political turmoil and floods. Bangladesh too is finding the going tough amid the weakened taka. Imports have become costlier and countries, especially the comparatively smaller economies, have no option but to reduce exposure in the same way to stave off the drain on forex outgo.

3. High energy costs, inflationary pressures: While the world grapples with inflation, the European Union has been hit in particular thanks to the Russia-Ukraine war. The invasion affected changed trade flows, forcing the EU to become dependent on other finished steel sources like India and also China. Post-war panic buying led to an inventory stockpile among end-users amid high energy costs which forced many mills there to either cut production or temporarily shut down.

This too impacted imports, reducing exposure to procurements from China.

4. China's mega infra push: Post-the real estate industry collapse and Covid earlier this calendar, China needed big-ticket investments to kickstart its own economy. Recently, it added a further RMB 1 trillion ($146 billion) of funding mainly towards infra projects. By the end of May 2022, a total of RMB 2.03 trillion of special bonds were issued, accounting for 59% of the total quota, up RMB 1.4 trillion from the same period last year. According to estimates, the increase in new infrastructure investment in China this year is expected to reach RMB 180 billion. This infra push amid production cuts is also forcing Chinese steel mills to focus on domestic downstream industries with a weakened exports focus.

Outlook
Inflationary pressures, high energy prices, uncertainty in demand, prices and supply and China's infra push, will continue against the backdrop of the current geo-political tensions. These factors may keep China's exports lower on a m-o-m basis in August.

Judging on a long-term basis, China's share in overall global export sales is pegged at a leading 15% and a fall in the same would naturally shrink the size of the total seaborne steel trade in 2022 from the 416 mnt seen in 2021.

Also, China's decarbonization drive and focus on value-added, high margin steels will drive down overseas sales of commercial grades.