Chinese crude steel output has gone from strength to strength this year, hitting record highs in each of the past two months.
However, as seen in the chart below from the Commonwealth Bank, that strength entirely reflects improved domestic demand rather than demand from abroad.
Chinese steel exports have been crunched, falling by 30% year-on-year in August, continuing the downward trend that began a year earlier.
“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,” says Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank.
Even with that sharp decline, Chinese crude steel output has risen by around 5% from January to July, something Dhar says reflects strong steel mill margins and resilient domestic demand.
“The increase in output is notable because of the headwinds facing China’s steel exports,” he says.
“End-user demand remains resilient as Chinese stimulus continues to flow through China’s commodity intensive sectors. China’s manufacturing sector is still expanding, while infrastructure investment continues to grow strongly.”
The gains in steel prices have also underpinned demand for iron ore and coking coal, helping to explain the strong rebound in prices from the levels seen in mid-June.
While he expects both factors will continue to support domestic steel demand in the months ahead as policymakers look to shore up growth before a leadership transition in mid-October, he says that steel prices will probably weaken in the latter parts of the year.
“Steel prices should fall from current levels by year end, as the supply additions prove too much for actual demand,” says Dhar, noting that he only expects a modest 2% increase in Chinese steel consumption this year.
However, he admits that view “may face risks” as authorities implement steel production cuts between mid-November and mid-March in order to improve air quality in northeastern provinces.