CHART: China's steel exports are falling fast and that looks set to weigh on prices

China isn’t exporting as much steel as it used to, and with domestic demand unlikely to keep up with an acceleration in supply, prices look set to fall in the second half of the year.

That’s the view of Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, who says that the combination of increased trade barriers and excess domestic supply will likely weigh on steel prices in the period ahead.

Here’s his take.

China’s net steel product exports fell by around 30% year-on-year in May, continuing the downward trend that began in August. China’s steel exports have been responding to trade barriers put in place by the US, India and the EU, as they try to protect their respective domestic steel industries. In summary, a total 27 countries took out a total of 119 trade actions against China in 2016. Forty-nine of these cases targeted imports of Chinese steels.

As the chart below demonstrates, that’s led to a pronounced slump in Chinese steel exports from the levels seen in recent years.

Source: CBA

And while Dhar sees domestic steel demand remaining firm, he says that the decline in steel exports is a clear headwind to domestic steel production and prices.

Stronger Chinese steel production, prompted by rising steel margins, have helped lift Chinese crude steel output by around 5% from January to April. The increase in output is notable because of the headwinds facing China’s steel exports. We only expect a modest lift of 2-3% in Chinese steel consumption this year, which compares with a 2% increase in China’s apparent steel consumption last year. Upside risk is low given policy makers will be careful not to propagate incentives that led to overcapacity in China’s industrial sectors over the last decade.

Given the combination of weaker export demand and risk that domestic demand will fails to keep up with supply, particularly after parliamentary elections are held in China later in the year, Dhar says that steel prices should fall from current levels “as the supply additions prove too much for actual demand”.

And given the linkages between steel prices and those of its raw inputs such as iron ore and coking coal, it suggests the risks for those commodities may also be to the downside.

In a note released late last week, Dhar said surplus pressures will likely return to iron ore markets in the second half of the year, something that will see prices fall to $US45 a tonne by the June quarter of 2018 in his opinion.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.