When domestic markets weaken, most producers turn to export markets to sell excess capacity, but you don’t just break into export markets overnight. It’s not that easy. Sort of like one does not simply walk into Mordor.
The tried and trusted short-term approach is to sell cheap, making it hard for buyers to refuse the low-priced product being offered.
Sell Low, Buy Ore Even Lower
If those mills are supported by plunging raw material costs and extensive local state support gifting them a break-even price around the lowest in the world, then the intent to simply “dump” metal into export markets has few barriers.
So seems the situation in China. We wrote Monday about the rising tide of aluminum semi-finished product that is about to turn into a flood with the removal of export tariffs in May, the situation in steel is, if anything, worse.
Steel exports have been rising fast, according to a Reuters.
Exports to India doubled last year and shipments to the Philippines rose 80%, as well. Chinese exports rose 41% in the first quarter of this year alone, prompting howls of indignation from Europe, India and the Middle East as lawmakers moved to try to either raise tariffs, bring anti-dumping legislation or in other ways hinder the flow of metal.
Despite protestations that Beijing is seeking to curb excess production (for reasons of the industry’s long-term health and to combat the pollution caused by less efficient steel production) the reality is little has been done to combat overproduction.
Reuters says China aims to cut the number of steel mills by more than 40% to below 300 by 2017, and plans, long-term, to have three to five giant steel players by 2025. It wants the top 10 mills to account for 60% of output, up from 37% of 2014’s production of 823 million metric tons.
But in the past this has generally manifested itself as a major player absorbing a smaller player, occasionally closing the very small, most polluting and inefficient plants, but at the same time investing in upgrades at the larger plants to increase production and meet the latest environmental standards.
Such moves meet Beijing’s primary focus of efficiency and pollution control, but do nothing for overall excess capacity and the damage it causes to overseas producers. Indeed, so attractive has the combination of low spot iron ore prices and export markets become that major steel groups are building new integrated coastal steel mills to take advantage.
Both Baoshan Iron & Steel and Wuhan Iron & Steel are either commissioning or constructing new integrated coastal plants this year. The situation is likely to get worse with export tariffs on some 90 items, among them being iron and steel, Chinese exports are going to be higher this year than last. Cheap imports are good news for steel consumers in the short term, but in the longer term if it proves to be at the expense of a viable domestic steel industry, we may live to regret China’s excess.