As the steady-state profitability of the domestic market lifts, the incentive to seek sales overseas will fall and we expect carbon steel exports from China to drop. Importantly, the price of these exports will be closely linked to the higher domestic prices, therefore, they will be priced higher relative to costs compared with recent years. We believe this situation will benefit steelmakers everywhere, as capacity utilisation of the industry lifts and profitability improves.
Improved Chinese industry health to spread?
We believe that closures in the Chinese steel sector have fundamentally changed the structure of the industry and, as discussed in our previous two Insights of this series, we expect this will lead to higher margins on steel sales and, more specifically, a stronger domestic market. But what does this mean for exports of steel, export prices and, more importantly, for steel makers elsewhere in the world?
The strength of the domestic market: a key determinant of exports
Analysis previously carried out by CRU has shown that there are three key determinants of exports from a country. These are:
- Strength of domestic market;
- Cost competitiveness;
- Strength of destination markets.
Our analysis indicates that the primary determinant is ‘strength of the domestic market’. The other 2 factors become important when a significant shift occurs, such as in 2014 when steel demand and prices in the USA were very strong, which pulled in imports, but also lifted scrap prices. In turn, higher scrap prices conferred a cost advantage on Chinese steelmakers delivering into the South East Asia region. In response, during the year, Chinese exports ramped up by more than 50%, with increased exports to the USA, but primarily to South East Asia.
Read the full story: http://bit.ly/Chinese-steel-exports
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