Why are China's steel exports slowing down?

China's Customs data shows cumulative steel exports in the first seven months of CY'21 was at 43.051 million tonnes (mnt), up 30.9% y-o-y. During this period, the cumulative imports of steel were at 8.397 mn t, down 15.6% y-o-y.

In Jul'21, the average import price for steel was $1,348.9/tonne (t), up 4.84% m-o-m, up 103.48% y-o-y. The average export price was 1,339.34/t, up 4.36% m-o-m and up 53.62% y-o-y. The spread between the import and export prices narrowed to within $10/t for two months straight.

In Jul'21, China's steel exports dropped by 789,000 t to 5.669 mn t, but were up by 1.476 mnt and 99,000 t compared to Jul'20 and Jul'19 respectively.

Reasons for lower exports:

• Revised export norms: On 28 Jul'21, the relevant governing body further cancelled the export tax refund on cold rolled and galvanised steel, involving 23 items and upped the export duty on ferro chrome and high-purity pig iron.
  
  

From the end-Apr'21, China has revised the export duty refund and tariff policies twice. As a result, the tax refund for exported steel is all removed, revealing the government's concern over steel exports and its determination to set a clear direction for an economy that will be driven by domestic demand, energy and environment clean-up focus against a backdrop of limited resources and environmental capacity.

• Policy changes: The output-related and other policy changes in China and policies in other countries have weighed on steel exports. On the supply side, due to environmental concerns, steel production cuts in the latter half of CY'21 could be seen. Steel allocations for exports are on the wane, indicating a new supply-demand pattern.
  
  

In Jul'21, the average daily crude steel output decreased to 2.7997 mn t, down 10.53% m-o-m, hitting the lowest from Apr'20. On the other hand, excluding China, the daily output of crude steel globally registered an uptick of 19.33% and 5.28% compared to the same month in CY'20 and CY'19 respectively.

It was revealed that China's overseas markets, in view of the policy changes on export and imports and the uncertainty that the same led to, are inclined to buying steel from CIS countries when faced with equal export offers. In Jul'21, the new export order index for the steel sector was 30.8%, down 11.5 percentage points m-o-m, which is at an over-15-month low. This indicator may forecast weak exports later especially coupled with production cuts and export policy adjustments.

• Export price spread narrowing: The price difference between China's and overseas markets is narrowing, though some products are still export competitive. In Jul'21, the rising momentum in steel prices in North America and the EU slowed down. Steel prices in North-East Asia, affected by the Covid spread also appeared to be weak. Price in China, however, stabilised from the previous decline.Though the price difference between Chinese and overseas offers narrowed, it widened for different categories and, for some export competitive products, traders remained active. In particular, China's rebar FoB prices are already above international mainstream levels, and the hefty price rise in cold rolled and galvanised products following the export refund cancellation is coming closer to CIS offers, though still lower globally. In hot rolled products, for which the export rebate was cancelled in May, the export advantage with CIS offers is narrowing.
  
  

Exports to South America, Korea rise: Exports to Asean countries are the highest but there are notable increases to South America and Korea too. China exported a total of 13.633 mn t to Asean, during the first seven months, up 25.8% y-o-y, accounting for 31.7% of the total exports. But this geography has been affected by the rainy season and Covid. Therefore, demand from Asean has been dull, characterised by weak prices and reduced imports while some allocations meant for domestic consumption are being diverted towards exports.

In the month of Jul'21, China exported 1.371mn t of steel to Asean, down almost 50% from the peak noticed in Apr'21, and also the lowest in the same period since the past five years.

In comparison, China exported 4.734 mn t and 5 mn t to South America and Korea respectively in the first seven months, up 105.9% and 35.6% respectively, y-o-y.

Outlook

China is going through a period of policy changes. This involves a more pronounced focus on economic development that is driven by domestic demand. The policymakers are watching how these changes impact the country's exim trade. The export rebate cancellation has already led to a 12% m-o-m drop in exports in Jul'21 over Jun. Steel mills, exporters and traders have moved to the sidelines, awaiting more clarity on policies before they take business decisions. Thus, exports out of China are expected to remain subdued in the second half.