Chinese steel exports to hit 7-year high in CY23

• Dull domestic demand facilitate exports
  
  
• Yuan slide help keep exports lucrative
  
  
• Expected Q4 output cuts may impact exports early next year
  
  

Morning Brief: China's steel exports retained their upward trend through the year. Volumes in the first nine months (January-September) of 2023 rose a healthy 32% to over 68 million tonnes (mnt) compared to 51 mnt seen in the same period in 2022.

On a m-o-m basis, however, September 2023 volumes dipped around 3% to 8 mnt against 8.30 mnt in August.

If exports continue at this pace, volumes will hit a seven-year high in CY2023 to touch 85-90 mnt.

It may also be noted that, m-o-m, exports in June fell 10% and in July, by 3%.

Country-wise break-up

SEA remains top importer: Southeast Asia remained the top importer of Chinese steel, with a 30% increase in January-September to 20 mnt (15 mnt in the corresponding period last year). Vietnam remained the top importer here at well over 6 mnt (4 mnt), a y-o-y growth of 52%. However, m-o-m, volumes in September fell 4%. Meanwhile, Vietnam's manufacturing sector lagged behind in the second quarter (April-June, 2023) because hot weather drove up electricity consumption, causing power outages which hit manufacturing which possibly led to the September fall in volumes with a lag.

MENA in second spot: Middle East and North Africa (MENA), which has been buying heavily from China, was in second position with 19 mnt, up 40% from 14 mnt in CPLY. UAE and Iraq have been buying in significant volumes.

However, steel demand in the MENA region is forecast to decrease 3.5% in 2023 and increase by 3.5% in 2024, following growth of 9.4% in 2022. The GCC's steel demand is expected to decrease in 2023 because of slow construction work in Saudi Arabia and Qatar following strong recovery in 2022. In 2024, the demand for steel will rise steadily with increasing momentum of mega projects and pent-up demand for housing, as per worldsteel.

That apart, Turkiye is struggling with inflation, still high energy prices and lack of demand at home and away (Europe).

Factors influencing high exports

Domestic demand recovery dull: China's domestic demand recovery has been somewhat mixed, with realty still the strongest pain point. During January-August, apparent crude steel consumption touched 658.5 mnt, more or less the same y-o-y and up a mere 30 mnt from 2019 levels. From the demand side, even if property failed to gain ground, certain other user-segments staged a comeback. For instance, manufacturing investment increased 5.9%, and the growth rate was 0.2 percentage points faster than that from January to July, 2023.

In terms of industries, investment in mining increased 2%, and in power, gas and water supply, by 26.5%. Infrastructure investment (excluding power, heat, gas and water production and supply) increased 6.4% y-o-y. Investments in railway transportation and water management were up 23.4%, and 4.8% respectively, and in road transportation by 1.9%. But investment in public facilities management dipped 0.6%. The national manufacturing purchasing managers index (PMI) in August was 49.7%, a m-o-m increase of 0.4 percentage points from July. Manufacturing boom is expected to increase further soon.

But, NBS data reveals, from January to August, 2023, national real estate development investment was at RMB 7.69 trillion, a y-o-y a decline of 8.8%, in which, residential investment was RMB 5.8425 billion, down 8% y-o-y.

In September, weather conditions greatly improved, and both construction steel and plates demand recovered. October is still the peak season, and demand is expected to remain relatively high.

Yuan depreciation makes exports lucrative: The Chinese RMB has declined almost 8% against the dollar in the last one year, making exports lucrative. From a level of 6.72 in the second week of January 2023, it is currently at 7.32 to the dollar. Thus, even if mills export at lower price points, they make money. From a high of $693/tonne in March this year, HRC offers fell to as low as $556/t in September this year.

High energy prices in importing countries: Some of China's importing countries encountered high energy prices, which made imports a more viable option compared to manufacturing at home. MENA countries have grown steadily since the Covid era of 2020 and will continue to do so, albeit at a more moderate pace. They still benefit from the elevated oil prices, but are affected by the oil production cuts imposed by the OPEC+ cartel to prevent oil prices from falling. MENA's trade prospects are one of the best globally at present, but this mainly offers opportunities for Asian trading partners. Western countries are increasingly disconnected from the region. For the Gulf states, in particular, it is part of a national strategy to deepen trade ties with countries in Asia and also Africa.

Outlook

Chinese steel production has remained high y-o-y so far, but it is expected that the local production cut dikats will have some impact on output levels in Q4 (October-December). And this can impact exports eventually as mills would want to allocate for domestic consumption first and then look at exports.

"China's steel production is likely to decline moderately during this year's fourth quarter, mainly due to production control measures and policies aimed at reducing the country's energy consumption and protecting the environment," a CISA official observed.

However, since these volumes were booked much earlier, the shipments will land in the current month or next. Thus, China's export volumes will continue to remain on the higher side in the near-to-medium term and possibly taper off in early 2024.