Chinese Steel Demand Improves

With around half of the world’s production, China is by far the most influential country in the global steel industry. In recent years, a slow-down in demand in the country has led to an explosion in exports as Chinese producers sought new markets rather than cut production which subsequently had a profound effect on world prices.  In the past few months, however, there is evidence that this trend has reversed.

At the start of 2016, in response to the lower domestic demand, Chinese production was predicted to decline in the year as a whole. In the first two months of the year, this trend was apparent with a fall of nearly 6% year on year.  In March, however, this trend reversed and Chinese production started showing a year on year rise each month which accelerated from August through to November.  The upshot of this is that by the end of the year, Chinese production actually posted a 1% rise in the year as a whole.

In the past, the consequence of this rise in production would have been a subsequent growth in exports but this has not been evident in 2016. In the first half of the year, Chinese exports of total steel did indeed continue on their growth trajectory with a rise of more than 9%.  In the second half of the year, however, just when production growth started to accelerate, Chinese exports actually declined with Q3 showing a 9% reversal and Q4 posting an astonishing decline of nearly 20% year on year with the lowest quarterly total since Q2 2014.

This phenomenon has helped propel global prices for nearly all steel products and raw materials to highs not seen since 2014 and would suggest a big hike in Chinese demand for steel but is this the full story? It seems as though this has not led to a build in stock as Chinese steel inventories as a proportion of production were at a historic low of 8.2 percent in November. It appears that this increase in apparent demand reflected in consumption, prompted by an unexpected round of credit stimulus in 2016 as the government pushed money into infrastructure to maintain GDP growth at around 6.5%.

China’s chief government forecaster has said that a predicted decline in steel demand would not happen in 2017 as a decrease in steel use by the property sector this year would be offset by strong railway, port and highway construction. He said that China’s crude steel production would rise by about 0.3 per cent with a further reduction in exports.

It seems then, with real Chinese domestic demand improving and exports declining, partially as a result of anti-dumping legislation being enacted across the world, that the near term prognosis for the global steel industry is better than it has been for some time. At 23.9MT in Q4, Chinese exports are still highly elevated, by historic levels, at a level above the total annual figure for Italy, however, so any small percentage change to the demand outlook in the country would have a profound effect on the industry as a whole.

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Chinese Steel Demand Improves

Chinese Trade in Coal and Coke

We have covered the trade in Chinese steel and iron ore in considerable detail here in the past but ISSB also monitors the trade in some other products and today we are looking at the Chinese coal and coke trade. China is the world’s largest producer and consumer of coal but the country only became a net importer in 2009.  Since then, Chinese imports of coal increased by over 150% to peak at 327 million tonnes in 2013 with internal production estimated at around 3.7 billion tonnes.  Since 2013, however, it has been a familiar story with reduced industrial demand leading to falling imports, which in 2015 were down 36% from the peak just two years prior, and an over capacity situation which is estimated by Reuters as being an astonishing 2 billion tonnes last year.

China imports most of its coal from Australia and Indonesia and the price of Australian hard coking coal has nearly halved since the end of 2013 to just over $76 per tonne as of the end of last week. The Chinese Government has responded by stopping approvals for new coal mines for three years but given the current huge overcapacity, this is unlikely to make much of a dent on falling prices.  In addition, however, there are plans within China to reduce capacity by some 70 million tonnes internally but again, given the estimated 2 billion tonnes of overcapacity, it is hard to see this having much of an effect either given the predicted fall in industrial demand for the raw material in 2016.

One option for China to use this excess coal being produced is to turn it into coke, subject to coke oven capacity, and in contrast to coal, China is a net exporter of coke and is the largest supplier in the world. Last year Chinese exports increased further, up more than 11% when compared to 2014 and represented close to a nine-fold increase in exports since 2012.   At the start of 2013, the 40% tax on metallurgical coke exports from China was removed, despite the detrimental effect on air quality on production of the material, opening the door for supply to enter the already oversaturated global market with predictable consequences on prices as export prices fell by 47% over the past three years.  The largest markets for Chinese coke are India, Japan and Brazil but as with steel, there is evidence that in some of these countries measures are being taken to protect domestic producers with India initiating anti-dumping procedures against imports of coke from China.

Going forward, it is hard to see any of the government initiatives having much of an effect on the coal producing overcapacity situation in China and as with coal, global demand for coke is weak. Unless the export tax is reinstated or markets are successful with their anti-dumping initiatives, downward pressures are likely to remain on the price of coke as well as coal, with fundamentals which closely mirror those that we have seen in iron ore and steel.

 

Chinese Trade in Coal and Coke