China Poised to Grab the Global Steel Trade as Economies Open up for Trade

Summary

• Chinese economy has now picked momentum as was expected by many ASX-listed iron ore miners such as BHP Group Limited (ASX:BHP), Rio Tinto Limited (ASX:RIO), and Fortescue Metals Group Limited (ASX:FMG).
• The recovery in the steel-consuming sectors across China is propelling the steel demand, leading to price firming up in the domestic market, which coupled with weak inventory, is now prompting steel makers to charge their furnace.
• Furthermore, the global steel production is in peril as many manufactures are yet reeling under the impact of COVID-19 outbreak, presenting an opportunity for China to secure a large tranche of the global steel trade.
• China has a strong history of pushing the steel production up to keep the economy afloat in hard times, which could be inferred from the surge witnessed in its share of global crude steel production during 2008 GFC, when China represented 47 per cent of the global crude steel production against 38 per cent a the preceding year.

China is back on foot, and the steel industry, considered as the backbone of the Chinese economy, doing better than before, giving China an edge to secure large tranche of the global steel trade in the absence of competitive bids from different steel making nations, that are currently facing operational challenges due to COVID-19 outbreak.

The COVID-19 outbreak is now bringing the cream of the crop out from the Chinese steel sector, positioning it to dominate the global steel industry after establishing a major win in the rare earth space, accelerating a trend that has been there for over half a century.

China is at the top of the game for over a decade with its global steel production share increasing from 46.6 per cent ( Global production - 1,239 million tonnes) in 2009 to 53.3 per cent ( Global production- 1,869 million tonnes) in 2019.

China Monthly Crude Steel Production (Source: WSA)

While the global steel competition has produced relatively less amount of steel in April against their previous year performance, China has kept the furnace hot, accounting for 62 per cent of the global crude steel production, as per the assessment of the World Steel Association (or WSA), which registered a 54 per cent up tick against the previous corresponding period.

The red dragons are now coming out of the lockdown and travel restriction ahead of many other countries, and its economic recovery has started earlier than other nations and is poised to reach normalisation. However, China has also witnessed a deep plunge in the gross domestic product (GDP), which declined by 6.8 per cent in February 2020 along with a decline of 16.1 per cent in the fixed asset investment during the first quarter of the year 2020.

However, by the end of April, all major steel-consuming sectors across the nation were running up and at full capacity, leading to a demand spike in steel, and in turn, propelling the prices up, and prompting the local steelmakers to bring some skin in the game, with production hitting its highest levels in May 2020 since September 2019.

To Know More, Do Read: Iron Ore- The Rally From 15-Week High to a 52-Week High

In the recent past, the stimulus for economic growth announced by the government has been a strong pillar behind the recovery in Chinese economy and for the steel sector. Many stimuli injected by the local government across China has improved the fixed asset investment, leading to an increase in the local steel demand by 100bps in 2020 as projected by WSA, despite the fears of second-wave of infection.

As per the latest figure from the National Bureau of Statistics, the fixed asset investment improved in April with Fixed Asset Investment Index reporting a decline of 10.3 per cent on a YTD basis against the previous year (till April 2020), as compared to its previous decline of 16.3 per cent on a YTD basis against pcp (till March 2020).

Industrial production which took a hit of 8.4 per cent during the first quarter of the year recovered in April 2020 by 3.9 per cent on a yearly basis, pushing the demand for steel.

In 2017, a Chinese market giant – Tsingshan, commenced steel production with a capacity of 3 million metric tonnes per annum in Indonesia to undermine Western competition, reflecting on the Chinese presence in the Western space.

Furthermore, selecting Indonesia for the investment was not just a coincidence, but a strategic move providing direct access to the abundant nickel resources of the country, a major raw material necessary to make stainless steel products.

The Indonesian stance to ban the nickel export is in favour of the Chinese steel plant, as it now provides it a direct access to the nickel resources of the country, which is absent for Western competitors.

The recovery of Chinese economy is now gaining strength as was predicted by the ASX-listed iron ore miners such as BHP Group Limited (ASX:BHP) and Rio Tinto Limited (ASX:RIO).

To Know More, Do Read: How Prudent is the Bet on Iron Ore Miners Over China’s Recovery? – BHP, Rio, and FMG

The boom of the Chinese steel sector has been beneficial for the ASX-listed iron ore stocks, which have been in a consistent rally and some like Fortescue Metals Group Limited (ASX:FMG) even hitting record highs due to high iron ore prices.

To Know More, Do Read: Fortescue Metals Breaking All Records!! Here’s Why?

Furthermore, the quotes of Chinese steel are now comparatively higher in Europe amid a downfall in the domestic steel production, prompting the red dragons to capture market share of steel in Europe.

European Union Monthly Crude Steel Production (Source: WSA)

On 9 June 2020, the local steel manufactures in Europe have even urged the European Union to bring down quotas on Chinese steel over the fear of competition.

In a nutshell, while the global economy has been tumbling and reeling under the repercussions of COVID-19 outbreak, China is taking advantage of the early lockdown and has a head start. The economic boost provided by the local government is also fuelling economic activities across the nation, which, in turn, is pushing the steel demand and prices up.

The high domestic demand and recovering prices on the global front are now prompting steel mills across China to charge their furnace and producing much more steel, which now represents a dark cloud for global competitors as many are yet struggling with the slowdown and some like India, which is the second-largest steel producer is still dealing with a high number of COVID-19 cases, causing labour issues, and producing much less than the actual capacity.