Chinese steel exports rise 30% in Jan-Feb'24. Inventories may sustain volumes in near term

• Feb volumes drop 18% m-o-m on lower demand
  
  
• Supply glut, weaker currency support exports
  
  
• Stocks pile up ahead of Lunar New Year holidays
  
  

Morning Brief: China's steel exports retained their upswing in the first two months of 2024. China's Customs data, collated by BigMint, reveals, cumulative volumes over January-February rose a considerable 30% to nearly 16 million tonnes (mnt) against 12 mnt seen in the same two months last year.

Volumes in February, however, fell m-o-m by 18% to 7.17 mnt against 8.74 mnt in January amid liquidity issues, focus on domestic material and lower global demand.

Country-wise break-up

It is interesting to note that m-o-m, several key importing countries, including Vietnam, showed a decline but cumulatively, over January-February, recorded an increase.

"China has been exporting most of its steel to Southeast Asia and the Middle East - these being nearby and vulnerable markets. It is cashing in on the scale and distance. Both geographies are commanding over 50% of Chinese steel exports for more than a year now," a source observed.

SEA retains top slot but sees m-o-m decline: Southeast Asia (SEA) managed to retain its top slot despite the 18% m-o-m fall in volumes from key importers like Vietnam, Indonesia, Malaysia etc. Over January-February, 2024, exports to Southeast Asia rose 31% to 4.34 mnt (3.32 mnt in the same period in CY'23).

Vietnam remained the top importer with almost 1.86 mnt (0.86 mnt), a huge y-o-y growth of 117%. "Despite the drop in domestic prices in Vietnam, imported HRC prices from China remained competitive," reasoned a source.

However, Vietnam is feeling the heat of funding and liquidity issues and the general global downturn in demand, especially from Europe, which is its key market for hot rolled coils. Vietnam's own consumption was down 5% in CY'23. Plus, its own mills are facing the brunt of cheap imports from China.

Other Southeast Asian geographies like Indonesia and Malaysia, in a bid to reduce dependency on China, are ramping up their own capacities and also exploring alternate geographies.

MENA finds Chinese offers attractive: Middle East and North Africa (MENA), which has been buying heavily from China, saw a 19% m-o-m decline but cumulatively exports were up 34% to 4.19 mnt (3.14 mnt). The Red Sea crisis is impacting supplies into the Middle East and Chinese traders foresee freight and insurance costs rising because of the disruptions.

The Middle East has seen massive infra projects being announced which would require huge volumes of steel.

The natural choice for imports was China, not because it was the preferred option but because India got out-priced and war-ravaged Ukraine is facing its own challenges, the two geographies from where ME sourced considerable volumes.

EU buyers defer restocking amid falling currency: Although China is not a prolific exporter to the European Union, volumes here fell 16% to 0.53 mnt (0.63 mnt). EU buyers remained cautious due to high inventories and weak end-user demand, which caused restocking deferment. In addition, the Euro depreciated about 1.9% m-o-m against dollar in February.

China's region wise steel exports in 2M 2024

Reasons for the sustained upswing in Chinese steel exports

Supply glut supports high exports: China, despite maintaining a flat crude steel production trend in 2023 at 1,019 million tonnes (mnt), saw a slight uptrend with the onset of 2024. Production rose 1.60% over January-February, 2024 to almost 168 mnt, surprising markets, especially since domestic demand is still a challenge. The higher output was propelled by, in a chicken-and-egg syndrome, the persistently high exports. Also, improved performance of some of the downstream sectors, including manufacturing, infrastructure and automotive, demanded higher production.

Cut-throat pricing lures buyers: China's cut-throat pricing strategy helped to out-price other exporting countries, especially India, and sustain the volumes. For instance, in January 2024, average Indian offers to Vietnam were at $621/t CNF Ho Chi Minh City, whereas Chinese quotes were $12/t less at $609/t CNF HCMC. In February the spread widened to $13/t with Indian offers at $610/t and Chinese at $597/t.

Similarly, for ME, Indian January offers averaged $637/t CNF Jebel Ali, $18/t higher compared to the Chinese $619/t CNF Abu Dhabi. February saw the gap widening to $31/t as Chinese prices dropped to $603/t against the Indians' $632/t.

These offers were still higher compared to the benchmark Tangshan HRC and rebar prices of $568/t and $537/t respectively in January-February.

"ME buyers are going for Chinese material due to which Indian mills have lost a few enquiries -- and this is mainly because of prices," observed a source.

Stocks pile up ahead of Lunar New Year: Chinese mills and traders saw a huge pile-up of inventory ahead of the Lunar holidays, abetted by the combination of high crude steel production and slow home demand.

As per the China Iron and Steel Association (CISA), inventories of key enterprises in late-February 2024 stood at 18 mnt, a decrease of 5% compared to nearly 19 mnt in mid-February. But, late February inventories had risen by 5.82 mnt or 48% m-o-m compared with 12.20 mnt in late-January. In addition, inventories increased 3.44% y-o-y compared to late-February 2023 figures.

Currency depreciation remains a boon: The Chinese yuan (RMB) dropped around 5% to the dollar, averaging 7.16 in the first two months compared to 6.82 in the same period last year. A weakened yuan means more foreign exchange earnings for mills and exporters.

Outlook

Stocks at key mills saw a w-o-w and y-o-y increase in the first week of March. Thus, the weight of inventories will impact steel margins, and lead to production cuts in the near term.

A slew of measures is trying to lift the sagging property sector but a sharp turnaround is unlikely this year. Thus, exports may sustain their momentum in the near-to-medium term.