All good things come to an end and so, according to CRU, it is with Chinese steel producers, at least as far as export prices are concerned.
A recent article by the firm suggests rising steel prices have hit demand from overseas clients. Rising trade barriers have had an impact but more significantly for sales into the Asian market, CRU reports Chinese exporters are also facing increasing competition from keenly priced exports from Indian, Russian and Korean competitors, eroding Chinese exporters’ market share.
As the graph shows, export premiums were strong in the Fall but collapsed in late November and early December before recovering as the year ended, but recent price movements have shown a softening of export prices and a rise in domestic prices suggesting the market is responding to greater competition on exports and an inability, due to input costs, to compete as effectively on exports.
Chinese mills have benefited from the fall of the yuan renminbi relative to the U.S. dollar but input costs have risen sharply as the principal input products —iron ore and coking coal are dollar-priced commodities — which have risen strongly in 2016 on the back of robust demand before dollar strength is factored in.
As most of China’s steel output is domestically consumed and renminbi-denominated, it is likely to have an inflationary effect on China’s domestic steel prices, both directly by pushing up input costs, and indirectly as mills will hike list prices to defend margins in response to the increase in raw materials costs, CRU argues. This is certainly what we have seen throughout 2016 but just in the last few days’ MetalMiner’s Index has tracked domestic steel prices easing. Whether this is an early sign of a reversal in domestic steel prices or merely a temporary softening due to the holidays or lower winter seasonal demand remains to be seen but is certainly worthy of continued monitoring.
Reporting some specific mills’ behavior, CRU states that some mills have voluntarily reduced export capacity allocations simply because domestic prices are offering better margins than exports. China receives considerable global condemnation for the role its steel exports play in suppressing global steel prices and the actions Beijing has taken to allow a controlled weakening of the renminbi, the allegation being that a weaker currency helps exporters.
In fact, with the vast bulk of Chinese steel production being consumed domestically, margins have been negatively impacted by the weakening currency as input costs have risen but output prices have been constrained by a competitive domestic marketplace. If export volumes reduce further as a percentage of total production this trend will become more significant and encourage more mills to trim exports in preference to domestic sales.