Financial Daily from THE HINDU group of publications
Wednesday, Aug 31, 2005
Industry & Economy
China unlikely to be major steel exporter
Mumbai , Aug 30
DESPITE strengthening of global steel prices spurred by falling stocks and all round economic growth, the world's largest steel producer China is unlikely to become a significant exporter anytime soon.
Global steel prices have shown signs of strength following the end of the de-stocking phase in US and Europe and strong global industrial production with hot-rolled coil prices in the US improving by about $50 a tonne and spot prices for commodity grades in Asia improving around $20 a tonne.
The emerging conditions are ideal for China to foray into the export market in a big way. However, quality considerations may come in the way of China making a splash in the export market.
Chinese steel prices have traditionally been highly leveraged to the global price cycle, given the country's historical reliance on imported steel.
However, as China is self-sufficient for all but the highest grades of steel, domestic steel prices have become disconnected from the global cycle, experts said.
This has raised a question whether China can become a significant exporter.
If so, it could prove to be a drag on global price cycle. Given rising output in China, indications that stocks are beginning to build (albeit from relatively low levels) and an increasing price gap between domestic Chinese prices and regional prices, there could be expectation of exports from China.
"However, indications from regional trading sources suggest that there has been no increase in Chinese export offers, and regional buyers are not keen on most Chinese material due to bad experiences they had with Chinese exports in late-2004 and early 2005," according to Mr Jim Lennon, analyst with Macquarie Research Commodities.
Explaining the situation, the analyst pointed out that while the only Chinese steel which overseas buyers have serious interest in is from tier one or top steel mills, these mills sell at a large premium to the spot market and therefore, they are not competitive on current regional prices.
On the other hand, the quality of supplies from tier two or other mills in China is widely described as poor or worse, and overseas buyers have no interest in the products.
The Chinese steel industry is focused on production volumes, characterised by higher and higher output without much attention paid to quality.
Complaints from international buyers suggest appalling quality and non-availability of steel products in required sizes.
No doubt, China's exports were strong in late 2004/early 2005 due to extremely tight global supplies and wide differential between the prices of high and low grades.
The situation is considerably eased now, with the supplies much less tight and price differential narrowed following improved availability of better commodity grade steels from elsewhere.
"Chinese steel is no longer seen as attractive; and even if regional prices see a strong recovery, Chinese exports are still unlikely to rise," Mr Lennon remarked.
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