Chinese steel producers, facing a supply glut thanks to a slowdown in domestic residential construction, continued to look abroad to clear inventories in September. Steel exports jumped to 10.2 million tonnes over the month, a 42.7% increase on the levels of a year earlier. Between January to September, export volumes swelled to 73.4 million tonnes, up 35% on the same period a year ago.
That should be fantastic news for Australian iron ore and coking coal miners, right? These ingredients are required to make steel, so it should be beneficial.
Well, yes and no.
According to Vivek Dhar and Kofi Mensa, commodity researchers at CBA, the continued growth in Chinese steel exports is symptomatic of weak domestic demand, something that is illustrated by Chinese steel output contracting 2% in the first nine months of the year compared to the corresponding period a year earlier.
Essentially demand for steel is weak within China, so it’s being exported.
Dhar and Mensa offer a simple explanation for the weakness.
“The pickup in China’s net steel exports in September comes despite China’s crude steel output contracting 2% y/y from January to August, highlighting the weakness in China’s domestic steel consumption,” the pair wrote in their morning note.
“This is underpinned by slowing construction in China’s property sector, particularly in Tier 3 and 4 cities, which account for 80-90% of new construction volumes. Inventories in these cities are estimated at 3-5 years and large property developers appear to continue to avoid these cities on oversupply risks.”
While China is managing to circumvent this domestic slowdown by selling steel product offshore, Mensa and Dhar believe that flooding the seaborne steel market with excess capacity carries risks.
“Steel exports are now at record levels and trade barriers look to be an imminent risk,” they wrote.
“According to the South East Asian Iron & Steel Institute, more than 20 trade complaints have been lodged against Chinese steel exports, with seven cases stemming from Southeast Asia.”
If other nations implement trade barriers to protect their own steel industries, that will not only have negative implications for Chinese steel mills, but also the who miners supplying them.
“If China’s steel product export growth slows due to trade barriers, we could see a glut of steel in China push down domestic steel prices, likely translating through to weaker iron ore prices due to margin pressure,” they note.
According to Paul Bloxham, chief economist for Australia and New Zealand at HSBC, Australian iron ore imports rose by 8% in the 12-months to September, something he puts down to Australia’s natural advantage in being the lowest cost iron ore producer globally.
While Australia does have a natural advantage over other iron ore exporting nations, that will stand for little should China have its steel sector lifeline – seaborne exports – eliminated as a consequence of opposition elsewhere.
The iron ore price, as demonstrated in the chart below, is already under immense pressure. It’s fallen over 70% in just four years as demand slowed and seaborne supply, primarily from Australia and Brazil, ballooned. With a supply glut already apparent, any further negative headwinds will only pressure steel prices, and as a consequence iron ore and coal prices, further.