MNI Analysis: China Steel Exports Stall Due Pollution Controls

--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.

     AIR POLLUTION CONTROL TAKES PREDECENCE OVER OUTPUT

     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

demand.

     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.

     NEW POLLUTION EMPHASIS CAUSING STRUCTURAL CHANGE

     "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.

     STEEL PRODUCTION, DEMAND TO REBOUND IN SPRING

     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 Mysteel.com 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: william.bi@mni-news.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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