China’s Bumper Steel Exports Fuel Oversupply Concerns

Chinese steel exports are at an eight-year high as a property crisis undermines domestic consumption in the world’s second-largest economy and fuels concerns of global oversupply across several industries.

In the first two months of this year, Chinese exports increased 32.6 per cent against a year earlier to 15.9mn tonnes, the highest since 2016 for the period, according to figures from the National Bureau of Statistics.

Analysts believe Chinese steel exports are set to match or exceed levels from last year, when exports rose to about 90mn tonnes — the highest level in seven years — as China struggles to stimulate its economy and nascent efforts to cut production look insufficient.

“I certainly expect to see stronger exports as a whole over the course of 2024 for China compared to last year, and that’s the trend we’ve been seeing for the past few years,” said Daniel Hynes, senior commodities strategist at ANZ Research in Sydney.

Steel is an important barometer of growth in China’s investment-intensive economy, which many fear is moving into oversupply in sectors ranging from cars to solar panels due to a weaker than expected recovery in domestic consumption following the pandemic.

The country makes about 55 per cent of the world’s steel, so even a small increase in exports can lead to price pressures in world markets, analysts said. The last time China’s steel exports were this high was during an economic slowdown from 2015 to 2016.

“There’s too much steel in the world,” said Colin Richardson, head of steel at price reporting agency Argus Media. “Even with a pullback in China, there will be too much steel.”

The rising projections for China’s exports follow the annual meetings of its rubber-stamp parliament and affiliated political advisory body, during which the government announced a less aggressive than expected stimulus programme.

Tomas Gutierrez, Asia editor at Kallanish Commodities, said following the meetings, known as the “Two Sessions”, Chinese steel companies began offering export contracts at significant discounts.

“Our initial expectations were that exports might moderate this year if the real estate market stabilised,” he said. But with property still slumping, “it seems certain right now that exports will be strong”.

The weaker outlook has also hit iron ore prices, said Harry Murphy Cruise, assistant director and economist at Moody’s Analytics.

“The lack of meaningful stimulus coming out of last week’s Two Sessions has dented the construction pipeline for this year, pushing iron ore prices down to just a smidgen above $100 a tonne, its lowest since August 2023.”

Aside from weaker domestic demand in China, ANZ’s Hynes said easier monetary policy in developed markets, expected to come later in the year, would provide an external driver for the country’s steel exports.

Analysts at BMO expect Chinese exports of 75mn-80mn tonnes of steel this year, as production remains steady despite the weak economy. Gutierrez said 2024 exports could match his estimate for last year of 94.5mn tonnes.

Colin Hamilton, commodities analyst at BMO, said China was channelling steel to overseas infrastructure projects in developing markets that it often finances and constructs itself, such as those under its Belt and Road Initiative.

“Before it was purely economic to try to export steel to the rest of the world,” said Hamilton. “This time around has been more geopolitical and strategic, garnering influence with the global south through steel-intensive investment.”

Western producers are better protected from the impact of rising Chinese exports than they were in 2016, said some analysts, largely thanks to tariffs and other trade barriers targeting Chinese imports, as well as subsidies for green steel.

But analysts said Chinese steel was still finding its way into western markets through Asian nations such as India, Japan and Vietnam importing cheap raw materials from China and then selling them to Europe as hot rolled coil or other steel products.

March 21, 2024