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China exports normalize on rebate cuts

Lower iron ore imports pose risk to near-term prices

China’s May steel trade data released today shows exports returning to normal levels, which is reassuring for the regional demand-supply balance. Moreover, iron ore imports plunged 9% MoM to 90mt, the lowest in the past 12M. With June–July being a seasonally weaker construction period in China (due to high temperatures and rains), iron ore imports are likely to decline further, which could impact iron ore prices in the near term.

Therefore, we expect regional steel prices to be subdued in the near term, particularly as China HRC prices have corrected by >10% in the past three weeks. Structurally, though, we expect the regional demand-supply balance to remain tight, which should keep spreads elevated for India’s steel mills. With high operating and financial leverage, SAIL remains the best play on steel prices, in our view.

Export rebate cuts lead to 34% MoM decline in steel exports to 5.3mt

* China monthly steel exports declined 34% MoM (20% YoY) to 5.3mt in May’21 due to: a) the removal of export rebates from 1st May’21, b) volatility in prices, and c) decline in demand from key importer Vietnam on the resurgence of COVID. Exports were ~20% higher than normal in March and April as traders looked to benefit from rebates before they were discontinued from May. Over Jan–May’21, China steel exports were up 24% YoY to 30.9mt (Exhibit 1).

* China steel imports at 1.2mt were up only 3% MoM despite the removal of tariffs on imports of semi-finished steel. CY21YTD, imports were up 12% YoY to 6.1mt.

* As a result, China net steel exports declined 40% MoM (+30% YoY) to 4.1mt. Over Jan–May’21, these increased 27% YoY to 24.8mt.

* China iron ore imports declined 9% MoM (+3% YoY) to 89.8mt in May’21. Inventory at ports declined 5% MoM to 113.6mt. During Jan–May’21, China iron ore imports grew 6.1% YoY to 472mt (Exhibits 2, 3).

Lower China export offers may once again lead to higher exports

* China domestic steel prices have been weak since mid-May when authorities had browbeaten the market on inflation concerns. In the last three weeks, HRC/rebar prices are down >10% to USD874/USD824 per ton (Exhibit 4). Thus, spreads have declined ~20% MoM to USD225/USD181 per ton for HRC/rebar (Exhibit 6).

* China HRC export prices have also declined 11% from the peak to USD945/t, with the likelihood of a further correction as domestic prices remain subdued. China export offers are currently at a ~10% discount to offers from other countries (such as Korea, Japan, and India), which may raise export volumes once again as well as pressure regional steel prices.

* Steel inventory (with traders in major cities) declined 14% MoM to 4.5mt (up 7% YoY; Exhibit 7).

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