CRU: How Long Will China’s Cost Disadvantage Constrain its Steel Exports?

By CRU Research Manager Paul Butterworth, from CRU’s Global Steel Trade Service

Although profitability for domestic sales in China has fallen sharply in 2019, steel exports from the country have not risen. Historically, when domestic profitability dropped, exports would rise. Prior analysis has shown that the strength of the domestic market is a key driver of Chinese export volumes, with additional factors being cost competitiveness and the strength of destination markets (see our Insight – Chinese steel exports: lower volumes, higher prices). Earlier this year, international markets were weaker than those in China and sales domestically were more attractive. As the year progressed, the Chinese market has weakened and, by late-Q3, margins there were negative. However, as international markets were also weak and Chinese costs were higher than elsewhere, this has meant that Chinese exports have remained low. Earlier in the year, the Chinese domestic market, while weakening, was stronger than potential destination markets. Cost competitiveness was also a factor at this time, though it was not until the second half of the year that it become a key limiter of exports. High costs have been driven by strong domestic coal and scrap prices compared to international markets. This Insight will focus of the impact of this cost disadvantage and address potential outcomes should this situation reverse: in every case, global steelmakers’ margins remain weak unless the Chinese domestic market recovers.