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Needle Still Points South

--Weaker Steel Output and Higher Prices To Last For Some Time
--Steel Production, Demand Expected to Rebound in Spring
By William Bi  
     BEIJING (MNI) - The Chinese government's historic push to reduce air
pollution in northern China this year is having an unexpected positive side
effect: reducing trade friction with trading partners who have long complained
about the flood of cheap Chinese steel exports into their own markets.
     In China, which accounts for more than half of the world's output of steel,
export margins for pipes, reinforcement bars, cables and sheets have plunged,
coupled with the lowest domestic stockpiles in more than a year. Shipments in
the first 11 months were 70 million tons, down 31% year-on-year, according to
trade data released Friday.
     The reduced export trend is likely to persist for some time, according to
commodities traders and analysts interviewed by MNI. Demand has been pent up for
a few months now, and they will take a few months to sort out even when regular
production is resumed next year.
     The improved air quality in northern cities like Beijing this winter has
been the result of widespread restrictions on the use of coal for heating and
industrial production, including forcing residents to hastily switch to natural
gas or electricity, sometimes leaving them in the cold as infrastructure failed
to keep up. Prices of liquefied natural gas have surged. Industrial producers,
particularly steel mills, have become the primary targets for repeated audits by
government inspectors.
     Inventories of rebar are at their lowest in a year, as some of the
so-called "2+26" cities in northern provinces (Beijing, Tianjin plus 26 other
large cities identified by the Ministry of Environmental Protection) invoked
emergency measures and applied blanket bans on all steel production and delayed
major construction projects until spring. These administrative measures
distorted markets, clouding the outlook and the timing of a resumption of
     But the U.S. and European Union, which for years have tried and failed to
contain China's steel output, have President Xi Jinping to thank. Xi's vision of
a China with "lucid waters and lush mountains," laid out in his report to the
Communist Party Congress in October, has given environmental officials carte
blanche to halt operations that raise the air pollution index.
     "This campaign is unlike any previous ones we have seen: China's steel
industry is really being permanently transformed," said Zhang Yichen, director
of the research institute at Wanda Futures Co., a nationwide commodities
brokerage. "We don't see prices coming down quickly, nor will exports rebound.
These changes are structural. The economy is really shifting to a new model,
steel still matters, but to a lessor and lesser degree."
     Even though China's exports have fallen, shipments don't have much more
room to drop given long-term supply agreements in place, Zhang said. This
external demand will help put a floor under Chinese steel prices, given the
reduction in production capacity in the north. 
     Countries in Southeast Asia and the rest of the developing world don't have
readily available alternative supplies to meet their demand, Zhang said. Until
they build up their own steel-making capacity, they will have to contend with
higher prices in line with Chinese markets, Zhang said.
     Exports to the U.S. and Europe are not large, but lower domestic production
and other foreign demand will raise prices of these exports and so reduce their
size, Zhang said. Chinese steel exports are more of a bargaining chip for
western nations dealing with China, and do not have a substantial impact on
their economies, he argued.
     Chinese domestic steel production and consumption will continue to grow
next year, but at a significantly slower pace.
     In a study published this week by the China Metallurgical Industry Planning
and Research Institute. the growth of Chinese steel consumption is expected to
rise 0.7% to 730 million tons in 2018, well below the growth rate of 7.7%
projected for this year. Crude steel output will increase only 3% year-on-year
to 832 million tons in 2017, indicating a drawdown of inventory, with the growth
rate slowing further to only 0.7% next year.
     When the "2+26" environmental campaign ends in the spring, both production
and construction activities are expected to resume, Zhang said. Demand is
looking good at least for the first half of next year, with large development
projects like the new urban center Xiongan outside Beijing moving forward. 
     Earlier this year, research firm estimated the construction of
Xiongan city and related projects, such as building railways connecting it with
other major cities, would boost steel demand by as much as 20 million tons over
five years. 
     "It's clear we have not seen the end of Chinese steel consumption growth,"
Zhang said.
--MNI Beijing Bureau; +86 10 8532 5998; email:
--MNI BEIJING Bureau; +1 202-371-2121; email:
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