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The tariff department of China's finance ministry announced in December the reduction or elimination of export tariffs on steel products, effective January 1.
But as steel prices in China's domestic market are currently higher than abroad, why would local steel producers bet on exports?
BNamericas spoke to Alex Griffiths, Wood Mackenzie senior research analyst, to find out if we should prepare for a flood of steel imports or if exports from China are receding.
BNamericas: The Chinese move seems to be contrary to what the world excluding China expects regarding the flood of cheap steel. What does the government want with such a decision?
Griffiths: Supply and demand dynamics in the Chinese steel markets don't favor exporters at the moment. Supply is tightening as a result of both the successful closure of illegal induction furnaces, and the temporary closure of capacity in an attempt to curb pollution under the so-called 2+26 policy. And demand has risen this year.
This has resulted in Chinese steel price rises. Chinese producers can currently get more money selling into domestic markets rather than exporting. So why would they export?
The Chinese government doesn't need a tariff to discourage exporters and it's possible that the tariff cuts are just a response to this. Why penalize exporters that are making less money than domestic suppliers?
BNamericas: You said tariff changes do impact Chinese exports but the main driver is supply/demand in key export markets. How have those markets been behaving recently?
Griffiths: The main export markets are East Asia, particularly South Korea where demand is declining. And South Asia where demand is also falling. This is another indicator that suggests exports will continue to decline.
BNamericas: Latin America's share of China's steel exports in the first 10 months was 9.4%, compared with 6.9% in the same period of last year, according to regional steel association Alacero. Do you see the export tax cuts leading to increased steel exports to Latin America?
Griffiths: No, mainly because Chinese steel producers have little motivation to export when they can make more money in domestic markets at present.
BNamericas: You also said rebar and hot-rolled coil prices are higher in China than the EU. Do we have the same situation in Latin America?
Griffiths: We do. The EU and the US in particular, traditionally have among the highest steel prices in the world in their domestic markets. Latin American producers export to these markets to capitalize on this.
With Chinese long [steel] prices currently above US and EU prices, and flat prices above EU prices, it is one of the highest priced markets globally at present.
BNamericas: Do you see the Chinese decision worsening the country's trade disputes with Latin America, the US and the EU?
Griffiths: In theory, it shouldn't. The tax cuts are unlikely to result in a rise in exports and so in our view, other nations should not be adversely affected. However, the rhetoric and the sentiment don't always match the fundamentals.
About Alex Griffiths
Alex Griffiths is senior research analyst at UK-based consultancy Wood Mackenzie.
About the company
Wood Mackenzie, a subsidiary of US data analytics and risk assessment firm Verisk Analytics, is a global energy, metals and mining research and consultancy group that provides data, written analysis and advice. The company has offices worldwide, including in London, Houston, Moscow and Sydney. In Latin America, it is present in Argentina, Brazil and Peru.