International Steel Mills

Chinese Steel Exports Forecast to Expand

November 8, 2015

Steel Market Update saw a note from Bank of America Merrill Lynch metals and mining research group out of the UK regarding takeaways from their recent trip to China. In the note the group was skeptical of the push by the Chinese central government to remove another 80 million metric tons (88 million net tons) of steel making capacity from the markets by 2017. “The steel sector is likely to stay oversupplied, in our view. We do not believe government plans to reduce capacity by 80Mn tonnes by 2017 are likely to be achieved. 60% of capacity is controlled by the SOEs, which have social security as their key objective, not profit. The situation is made worse by the banks that need to see mills producing to avoid losses on loans…” (SOEs = State Owned Enterprises)

The BoAML research team then continues with, “…With demand potentially weaker in 2016 due to issues in real estate, exports are likely to stay elevated, and given the push towards consumption-led growth an all-resolving stimulus package seems unlikely, which means exports could rise further from current 130Mn tonnes [143 million net tons].”

To put this into perspective the U.S. steel industry has the ability to produce about 110 million net tons… (the U.S. is the third largest steel producing country behind China and Japan).

This analysts group has Chinese steelmaking capacity at 1.1 billion (with a “b”) metric tons.

I went to one of our Asian iron ore and steel trading sources to get a feel for the size of the Chinese steelmaking capacity from his perspective and asked at what levels does the trading community believe the Chinese mills will be exporting steel at in 2016?

Our source advised us, “John, China will export maximum 20-25% of their total capacity… It was always maximum 10% up till 2015 when market woes hit and now it is 20-25%, and with the cutbacks on production, it will remain at this number.”

When asked to comment on the current capacity levels of the Chinese mills we were advised that China is producing approximately 66 million metric tons per month (792 million metric tons or 873 million net tons). If his prognostication of twenty to twenty-five percent of their production is correct (and that there continues to be a reduction in the capacity available to make steel,) using 800-850 million net tons as a best guess where Chinese production levels could be next yea,r we could see China exporting 160 million net tons on the low end to as much as 212 million net tons of steel next year (or almost double the U.S. steelmaking capacity).

If this comes to be, the United States domestic steel market could be in for a tough year to raise prices in any meaningful way (whether China is shipping steel directly to the US or if it is going elsewhere where those tons will be displaced and will look for a new home).