WSD Strategic Insights CLXXIX: The Chinese Steel Exporting Armada is Back!

The “Chinese Steel Exporting Armada” has made a resurgence as an incredible threat to its offshore competitors - history has a way of repeating itself.

In 2015, the global steel industry’s structure was in the midst of profound change as Chinese domestic steel demand had entered a significant downward phase.  As it became evident to the Chinese mills in early-2015 that they were probably facing years of significant oversupply, they launched a steel product export offensive.  Unwittingly, they drove the hot-rolled band export price to a level well below the marginal cost of the median-cost producer.  Reflecting their aggressive posture, exports in the latter months of 2015 rose to a 120 million tonne annual rate versus only about 50-60 million tonnes a few years earlier.

In response to this threat, a number of the non-Chinese steel mills dramatically cut their price to compete directly with the Chinese in order to prevent a further loss of market share.  These price cuts led to a condition of “financial calamity” for many steel mills in China and elsewhere.  Also, because they were being destroyed by the Chinese mills (they claimed the Chinese mills were “not playing by the rules”), many steel mills rushed to their governments to set in place import constraints on offshore steel entering their home market. 

At present, HRB export price “pyrotechnics” are forecast despite little change in underlying global steel demand.  The forces driving the price volatility include:  a) the sizable shifts in steel market psychology depending on whether the steel buyers or the sellers are winning the war; and b) the Chinese government’s policy stance with respect to the beleaguered property market that has been dragging down economic growth and steel demand in the country the past few years.  China’s steel export rate in January- February 2024 is up 32.6% y/y reaching a high of about 97 million tonnes annualized compared to the prior year. In 2023, it has been about 90 million tonnes, up about 36.2% versus 2022 and the highest since the 2015-2016 Chinese “export armada” pummeled the global steel industry profit condition to unprecedented historical lows. 

As of mid-March, the export market for hot-rolled band is increasingly dormant, with Chinese offers dominating the market in the $520-540 per tonne range, according to WSD contacts.  Indian steel producers have recently returned to the market, according to one WSD contact, with offers that equate to about $560-570 per tonne, FOB port of export; Japanese and South Korean offerings are at about a $10-30 per tonne premium to Chinese prices, albeit transactions are rather limited at present.  Brazilian Ministry of Industry has reportedly opened an antidumping investigation into a variety of products imported from China, with a particular focus on steel.  Brazilian steel producers are seeking 10-25% tariffs to be levied on Chinese steel imports, which have risen about 50% from 2022 to 2023. Buyers appear content to “sit on their hands”, taking a “wait and see” approach as they seek clarity around the next direction in the market. 

Looking ahead, a number of steel mills both in and outside of China have seen their profits decline to “razor-thin” levels, just as pressure to make concrete decisions around massively capital-intensive plans to decarbonize their facilities is reaching its peak.  Given the current condition of balance sheets, WSD is optimistic that the industry is well-positioned to weather the storm.  However, should the demand situation in China continue to deteriorate in the years ahead, especially as the steel-intensive property sector remains under massive downside pressure, the Chinese Export armada could ultimately sink the balance sheet “war-chest” accumulated by the non-Chinese mills during the 2021-2023 golden era of steel industry profits.

This report includes forward-looking statements that are based on current expectations about future events and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict.  Although we believe that the expectations reflected in our forward-looking statements are reasonable, they can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including among other things, changes in prices, shifts in demand, variations in supply, movements in international currency, developments in technology, actions by governments and/or other factors.

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