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China’s steel exports rise as domestic demand weakens

Production moderates due to low demand and spreads

China’s apparent monthly steel consumption fell below 1% YoY last month for the first time since Mar’20. Lower consumption in China also pushed mills to export more, with June exports rising 23% MoM. Despite higher exports, June crude steel production growth at 2.5% YoY was the lowest in the past year. Given the Chinese government’s objectives to control steel production and emissions as well as cool domestic steel prices, we believe higher exports raise the risk of the imposition of export tax. Export tax, if imposed, would raise regional steel prices due to tightened supply and be a positive for the sector outlook.

Steel production growth moderates to 2.5% in Jun’21

* China’s steel production moderated to 2.5% in Jun’21, against 13% YoY growth in 5MCY21. On a MoM basis, production declined 5.7% to 93.9mt; however, average daily production was down 2.5% MoM to 3.13mt. In 1HCY21, China’s crude steel production increased 10.5% YoY to 558mt (Exhibit 1).

* We attribute the MoM decline in steel production to softened demand and margins due to weaker pricing.

* However, improved margins (on the back of a rebound in prices) and easing production cuts in Tangshan could lead to a rise in production in Jul’21.

* China’s apparent steel consumption (production + imports - exports) declined 1.2% YoY to 88.7mt and was down 3.5% MoM (adj. for no. of days). In 1HCY21, steel consumption rose 9.1% YoY to 528.4mt. However, it declined ~2.1% in 2HCY20 – notably, this was the first such decline seen in five years(Exhibit 2).

* The decline in China’s steel consumption is evident from the ~11% YoY decline in China’s passenger car sales to 1.57m units in Jun’21 (-5% v/s May’21; Exhibit 3).

* While the Chinese government intends to keep CY21 steel production flat YoY, we believe this is unlikely as it implies a 2H ask rate of 8% YoY decline.

China’s steel exports rise sharply, raising risk of export tax

* China’s steel exports rose 23% MoM (75% YoY) in June to 6.5mt – much higher than normal. We attribute this to a) Chinese export offerings being at a ~10% discount to regional prices and b) softened Chinese domestic demand. In 1HCY21, exports rose 30% YoY to 37.4mt. China’s steel exports as a percentage of steel production rose 100bps YoY to 6.7% in 1HCY21.

* China’s steel imports edged up MoM to 1.2mt (down 33% YoY). As a result, net exports rose 28% MoM (1.9x YoY) to 5.2mt in Jun’21 (Exhibit 4).

* China’s steel exports remain high despite the removal of export rebates and the rise in domestic steel prices (7% in July). As a result, we see higher risk of the Chinese govt. imposing tax on steel exports to cool export and domestic steel prices.

China steel prices up once again in July

* China’s domestic steel prices have rebounded in July, with spot steel prices rising 7% MTD to USD897/USD801 per ton for HRC/rebar (Exhibit 5).

* The rise in steel prices has also led to improved spot steel spreads. As a result, spot spreads for HRC/rebar stand at USD223/USD138 per ton, significantly higher than USD169/USD88 per ton at end-June (Exhibit 7).

* Steel inventory (with traders in major cities) rose 11% MoM to 5.03mt (up 21% YoY; Exhibit 8).

* China/Korea FoB export prices are trading at USD940/USD1,035 per ton (Exhibit 9).

* India’s domestic HRC steel price discount to import parity increased to ~20%, primarily due to decline in domestic prices (Exhibit 10).

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