(The opinions expressed here are those of the author, a
columnist for Reuters.)
* China's steel product exports: tmsnrt.rs/2rMrdIc
* China's real estate investment: tmsnrt.rs/2tjvwN8
By Andy Home
LONDON, June 19 China's exports of steel product
have fallen sharply over the first few months of this year.
The January-May total was 34.2 million tonnes, down 26
percent on last year's equivalent figure and the lowest read
The year-on-year drop in tonnage terms was 12.1 million,
which is roughly what Canada, the world's 17th-largest producer,
churned out over the full 12 months of 2016.
The only recent historical comparison for such a dramatic
and sustained drop in steel exports was 2009, when demand in the
rest of the world was imploding in the aftermath of the global
So what's happening this time around?
Is this a sign that China's much-hyped capacity closure
programme is finally starting to bear fruit?
The rest of the world's producers would love to think so
but the evidence suggests things are a little more complicated.
Graphic on China's monthly exports of steel product:
CAPACITY DOWN, PRODUCTION UP
Beijing does targets well and it's already way ahead of its
goal for steel capacity closures this year.
A total 42.4 million tonnes were shut in the first five
months of this year, representing 85 percent of the
50-million-tonne target, according to the National Development
and Reform Commission.
That follows 65 million tonnes of closures last year and
brings the running count to over 100 million tonnes, now well
within the 100-150 million range originally promised by China
over a five-year period.
The only problem is that these shutdowns have had no
discernible impact on steel production.
China produced 72.78 million tonnes in April, an all-time
record. Production eased very slightly to 72.26 million tonnes
in May but that was still the second-highest production month
This counterintuitive outcome is down to what exactly has
The initial round of capacity elimination appears to have
included a large amount of non-productive capacity, an easy win
for producers and local governments looking to fall into line
with the new national policy.
A second focus has been on induction furnace operators. Such
producers, using scrap rather than iron ore as their input and
frequently accused of manufacturing sub-standard product, are
largely unapproved and therefore "illegal" in the eyes of
For that reason they are also unreported.
Millions of tonnes might be in the process of being closed
but you won't see any ripple in the national production figures
since they were never counted in the first place.
What is visible, though, is the resulting jump in
profitability of the official steel sector.
The margin on construction-grade steel rebar has surged more
than 800 percent this year to around 1,100 yuan ($162) per tonne
in early June, according to data tracked by brokerage CLSA.
With that sort of money to be made, it should be no surprise
that China's steel producers are running faster than ever
STOCKS DOWN, DEMAND UP
But quite evidently higher production has not fed into
Is there some form of voluntary restraint at work here?
After all, China has recently been the subject of
unprecedented political pressure to rein back its steel exports.
Trade cases are piling up thick and fast.
The European Union has just initiated another set of duties
on Chinese steel, these ones on hot-rolled flat products
, and the two entities are still duelling over the
broader issues of Chinese overcapacity and, in Europe's eyes,
Meanwhile, the mother of all sanction packages is looming in
the United States, where the Trump administration has been
investigating steel imports on national security grounds.
The so-called Section 232 probe is nearly done, according to
China might reasonably be expected to have taken some of the
heat out of the diplomatic storm by stemming the flow of
Yet there is absolutely no sign of any build-up in steel
inventory within China as might be expected if exports were
being massaged by policymakers.
Local consultancy Steel Home estimates that stocks of rebar
SH-TOT-RBARINV and flat products such as cold rolled coil
SH-TOT-CRCLINV have been falling in line with "normal"
Interestingly, those of rebar have fallen harder and faster
than those of coil, attesting to a broader divergence in fortune
between those mills servicing the construction sector and those
feeding the manufacturing sector.
While the latter has been showing signs of weakness,
construction is still booming.
True, there are all sorts of warning signs flashing in terms
of overheating prices in parts of the country's residential
But investment in real estate, one of the broadest
indicators published by the National Bureau of Statistics, is
still running at an annual growth rate in excess of 6 percent,
as has been the case since the most recent stimulus package
kicked off at the start of last year.
Graphic on real estate investment: tmsnrt.rs/2tjvwN8
FOR HOW LONG?
How long it can continue doing so is the subject of much
debate among analysts.
The consensus narrative is that the construction sector will
start losing momentum imminently before entering a period of
much slower growth over the second half of this year.
A caveat to the consensus is that the strength and
durability of the 2016 stimulus package have already surprised
But neither building activity nor those supercharged profit
margins are going to run indefinitely.
At some stage there will be a slowdown, which will feed
quickly into the steel sector, and super-quickly if it coincides
with seasonal weakness over the coming summer holiday season.
Don't expect China's steel producers to adapt supply fast
enough. Their track record is poor when it comes to adjusting
production to changes in demand tempo.
Rather, the pattern has tended to be for demand weakness to
lead to falling prices, margin compression and accelerated
Current low export levels are first and foremost down to
strong domestic demand.
If that fades, Beijing's control over its leviathan steel
sector and those politically toxic export flows is going to be
put to the real test.
(Editing by Dale Hudson)