US trade tariff removals may lift China's indirect steel exports in H2

• US mulls removal of Trump-era trade barriers to control inflation
  
  
• US consumption may lift indirect steel exports in H2
  
  

Morning Brief: China's indirect steel exports will likely increase in the second half of 2022, if global headwinds are of any indication.

Meanwhile, recent data reveals that indirect exports of steel from China almost doubled from 2007's levels of 50.43 million tonnes (mnt) to a record 84.88 mnt in 2018.

Indirect steel exports comprise a gamut of products, including engineering, mechanical and white goods and several other items.

Overall, China had been pushing a policy of concentrating on value-added steel exports and lessening the weightage on commercial grades. However, Covid spoiled its plans, drying up domestic demand in the first half (H1). Thus, even if steel exports fell in January-June, 2022 by 11% y-o-y, volumes in May touched a record one-year high while June's were a shade lower than May's.

Following a similar trend, China's indirect steel exports too were high in H1 to offset lower home consumption. For instance, overall sales of various kinds of loaders fell 23.2% y-o-y, in which domestic sales fell 34.5% but exports increased 19.5%. Similarly, sales of excavators fell 36.1% y-o-y in H1, where domestic sales dropped 52.9% but exports were up 72.2%.

Another telling pointer is data from the China Association of Automobile Manufacturers (CAAM). Auto sales in H1 fell 6.6% y-o-y, but exports increased 47.1%.

Exports, undoubtedly, acted as a saviour in H1, helping to sustain certain manufacturing sectors. For instance, automobile production in June was up 26.8% y-o-y in which the new energy vehicles segment spurted 120.8%, despite the pandemic impact.

Going forward, although inflation has weakened global demand, many feel there are opportunities for China to increase its indirect exports in the second half of 2022.

What factors will support an increase in China's indirect exports in H2?

Lifting of US trade sanctions: The major reason is the US. The high-profile trade spat between the US, under President Donald Trump, and China had garnered enough global attention. President Trump, calling imports a 'national threat', had imposed several tariffs and/or quotas on imports. A 25% tariff on $50 billion of Chinese exports was slapped, starting 2018, which included indirect steel items, with China taking retaliatory steps.

However, these measures led to an increase in the US' cost of imports. Resultantly, in a desperate bid to counter inflation, which is at a 40-year high in the US, and to offset high domestic cost of production at present, President Biden's administration is mulling removal of some of these tariffs. As per a study by the Peterson Institute for International Economics, a complete elimination of tariffs would result in a 1.3% drop in inflation. US Commerce Secretary Gina Raimondo, while recently speaking on easing tariffs on China, said: "There are other products - household goods, bicycles, etc - and it may make sense" to weigh lifting tariffs on those. But, she added, the administration had decided to keep some of the tariffs on steel and aluminum to protect US workers and the steel industry.

However, a rollback of some barriers spells good news for China's indirect steel exports.

China's steady supply chain: The Russia-Ukraine war has disrupted supply chains in most countries. Rising crude oil prices have aggravated the scenario, making logistics costlier. However, China's supply chain has remained steady which helped it keep its exports high in May-June. This factor will also support its indirect steel exports.

Outlook
Almost every country today is grappling with inflation, a factor which is likely to drag down consumption over the next few quarters. Imports-dependent countries, felled by the double whammy of inflation and a depreciating local currency, may lessen their purchases from China. However, China can more than make up for this loss if US imports resume on the back of tariff rollbacks.