- Production cuts, decarbonisation policy support lower exports in H1
- China’s direct steel exports in 2022 estimated at 58-62 mnt
- Possible rollback of US sanctions may lift indirect steel exports in H2
Morning Brief: China’s steel exports dropped 11% in January-June, 2022 (first half or H1) to 33.28 million tonnes (mnt), as per data maintained with SteelMint. Volumes in the same period in 2021 were at 37.38 mnt.
Key exporting destinations
Middle East and Africa leading importers: Exports to the Middle East and Africa were the highest at 8.52 mnt followed by 8.33 mnt to Southeast Asia. East Asia (Japan, Korea, Thailand) stood as the third-highest importing geography, at 4.99 mnt.
Southeast Asia demand a tad subdued: It may be noted that Southeast Asia is traditionally the largest import destination of Chinese steel products, especially Vietnam. However, in H1, Vietnam’s own demand was somewhat subdued because of high global steel prices especially in the aftermath of the Russia-Ukraine war. The war also impacted Vietnam’s European market where it traditionally sold value-added hot rolled coils and other products. Lastly, Vietnam buyers preferred domestically sourced material because of the price competitiveness. However, the fact that exports to Southeast Asia, at 8.33 mnt, were not too far away from 8.52 mnt exported to the Middle East and Africa, prove that Vietnam did buy in substantial volumes because of China’s aggressive pricing.
Europe trade barriers: Exports to Europe were much lower, at 2.28 mnt, because of import tariffs slapped by the EU on Chinese goods over the last few years. However, in H1, mainly in May, China did export a good amount of steel slabs to the EU which can be categorized under ‘semis’ and do not qualify under the current finished steel data
Link to country-wise exports PDF
Why are exports down in H1?
1. Decarbonisation policy: China has embarked on a policy of decarbonization, whereby it aims to achieve carbon peaking by 2030 and neutrality by 2060 which supports lower exports. Working towards this agenda, the Chinese government announced production cuts in the steel industry, it being one of the most environmentally polluting sectors.
Dovetailing with the production cuts, last year, China also announced in late April last year a withdrawal of export rebates of 13% on VAT on 146 steel items, including the key product – hot rolled coils (HRCs) from 1 May 2021 and then again on more products from 1 August, 2021. The idea was to discourage exports and keep the steel produced for domestic use and instead focus on high-margin value-added steel.
Thus, such measures are paying off with overall H1 export volumes lower y-o-y.
Mills, early last year, pre-empting such rebate withdrawals, had exported in hefty volumes in H1, 2021, especially in March-April, 2021.
Even if overall H12022 exports were down y-o-y, May volumes were the highest in the last one year, at 7.76 mnt. June saw volumes rising 17% y-o-y to 7.56 mnt but down 3% m-o-m. Mills were keen to cash in on exports in these Covid-ridden months to offset dull domestic demand and global steel prices that rose close on the heels of the onset of the Russia-Ukraine war.
2. War impact: Overall global demand was impacted by the onset of the Russia-Ukraine war, which pushed up energy costs, escalated supply disruptions and boosted steel prices.
Production guidance
Earlier this year, the government announced production guidance. There is no specific figure on how many tonnes of crude steel will be produced in 2022 but the policy (April 2022) released by the National Reform and Development Commission (NDRC) said output should be lower than the 1.033 billion tonnes produced in 2021. This gives some elbow room for production when demand for steel picks up at a later stage. In 2021 too Chinese mills had worked under production cut diktats.
Outlook
Direct steel exports in the second half (H2) will possibly be lower compared to H1 levels, keeping in mind China’s policy of de-focusing exports de-focus. H2 will see an infrastructure push which would lead to higher domestic consumption and naturally mills would focus on serving the domestic market. Market expects export could be in the range of 58-62 mnt in 2022 against 66 mnt in 2021.
However, indirect steel exports are likely to go up if US trade barriers are rolled back.
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