The Steel Trade War-U.S. and China edition
“China doesn’t hopes to be in a trade war, but is not afraid of engaging in one.”
On March 22nd, the Chinese government published a statement that it would launch a series of retaliations to hit back against Washington’s decision of imposing tariffs on steel and aluminum imports from China. China signaled it would impose higher duties on US goods such as pork, apples and steel pipes. The news sent the Dow Jones Industrial Average down 724 points or 2.93% on Thursday, and the rout continued in Asian markets. The Nikkei 225 in Tokyo closed 4.51% lower, while shares in Hong Kong fell 2.45%, the CSI300 in Shanghai lost 2.86% and the Kospi in Seoul was down 3.37%. In Australia, which exports more iron ore to China than any other country, the ASX200 benchmark index was off nearly 2%.
Will the tariffs on Chinese steel imports help U.S. steel manufacturers?
President Trump’s decision is to slap a 25% tariff on steel imports. He means to support domestic steel industry from the cheap-steel-imports flooding the market. In 2017, the volume of U.S. steel imports increased by 15 percent to 34.6 million metric tons. The value of U.S. 2017 steel imports increased by 31 percent to $29 billion from $22.1 billion in 2016. According to data from Steel Import Monitoring and Analysis (SIMA), China’s steel exports accounted for only 2 percent of U.S steel imports in 2017 and ranked at 10th by source country.
The majority of the top 10 source countries have received temporary amnesty from Trump, such as Canada and EU.
The imposition of tariffs on Chinese steel imports will not change the domestic steel industry situation. In the United States, Steel demand is expected to increase by 1.2% in 2018, according to the report of Short Range Outlook 2017/2018 from the World Steel Association. Without any doubt, the imposition of tariffs will drag back the growth in steel demand. On the other hand, the tariff will increase the price of almost every product from automobile to canned soup. This will help the steel manufacturers to make a profit, while it will harm the consumers. Under the current circumstances, global investment and consumption will shrink, and the benefits brought by the tariff will largely be offset by the negative impact on the domestics economy.
According to data from AISI, in the week ending on March 17, 2018, the U.S. raw steel production was 1,826,000 net tons while the capability utilization rate was 78.3 percent. Even with a growing future demand of steel, the steelmaking overcapacity is another problem that cannot be neglected.
Will the tariffs hurt the Chinese steel industry?
During 2017, Chinese annual crude steel production increased by 5.7%. According to the report of National Bureau of Statistics of China, the annual production of raw steel in 2017 was 8.32 billion tons. In 2017, China’s steel export volume was 754.135 million tons and only 8.3 million tons steel exports were shipped to the U.S.. Comparing the amount of imports from Canada and Brazil, imports from China just occupy a tiny part of the U.S. steel market. Based on the statistics, we can estimate that the effect of the tariff imposed on Chinese steel export will be limited.
But will the tariff affect the domestic steel industry in China? The global steel industry’s capacity to produce steel has more than doubled since the start of the current century, from a level of 1.05 billion metric tons in 2000 to 2.39 billion tons in 2016. Chinese nominal crude steelmaking capacity account for 48.9 percent of the global steelmaking capacity in 2016. Chinese steel capacity ranked first among all countries’.
Although, steelmaking capacity has increased rapidly in China in the past, the trend is now changing. Chinese steelmaking capacity was cut by 500 million tons in 2017. Along with the reduction in steel capacity was a decrease of steel export volume by 32.58 million tons in 2017 and a tiny increase of steel imports by 0.75 million tons. Conclusively, domestic demand is the main consumer of the produced steel products.
Besides, the price of steel exports obviously grew at 3.1% in 2017 and with the slowdown of world steel demand, the steel exports are expected to decline in the future. Comparing the government’s efforts to cool the real estate sector to rebalance investments in the economy, the tariffs will barely affect the Chinese steel market and steel price. The government’s determination to pressure through a structural transformation of the economy, will result in Chinese steel demand growing at limited speed.
In February 2018, according to the data from China Iron and Steel Association, the storages of wire steel and steel rebar increased by 80% and 68% respectively compared to the same period in 2017. The storage in steel market is 102.8 million tons and storage onshore is 12.3 million tons.
According to a report from OECD, the demand of steel in China will decline at 1.1% per annum. But the quantity of stored steel is large and this needs to be consumed. Considering the employment in the steel industry, rapid steel capacity cut will force a large number of workers to lose their jobs. In 2016, the Chinese government has re-allocated nearly 2.01 million workers from the industry. It has also stated that it would complete the work of cutting the overcapacity by 1.5 billion tons before 2020, however, the pressure of workforce transferring from the steel industry will possibly delay the plan.
In conclusion, the tariff will not cause huge damages on Chinese steel industry. But in the critical time of economic structure transforming and under the shadow of gradually prevailing global trade protectionism, Chinese steel industry would probably be stuck into a deterioration. It is difficult to say whether the tariffs would not be the fuse of bomb of deterioration.
How has the market reacted?
On March 23rd, on the Shanghai Futures Exchange, the hot roiled sheet price closed at 3706 and decreased by 9.6% from 2nd March. On the same date, the steel rebar price closed at 3584 a decrease of 12.58% from 2nd March. While the steel wire price increased by 10.2% in the same period and closed at 3439. From the beginning of 2016 until now, the price of steel futures has increased on average 70%. After the news of the tariffs imposition, the price fluctuated slightly and most Chinese investors hold positive expectations of the future price in the steel market. Chinese Steel industry is highly policy oriented and government subsidided, tariffs rarely hurt the chinese steel industry. But, due to the pace of the structural transformation of the chinese economy, the future of the steel industry is very bleak. As trade protectism is gradually taking over for the free flow of goods, the Chinese steel industry is unavoidable stepping into the shadow of declining.
In the short-term, the Chinese steel futures price index can possibly continue on the downward path. Because of the delay in the steel consumption season and the warehouse build up since the end of 2017, most of the traders in the steel market are on the edge of cutting their storages and this situation will ultimately accelerate the decline in prices. On the other hand, steel manufacturers are still boldly increasing their production due to the urgent need to clean the high sotrage is just in the consideration of down-stream traders. If the price falls below a floor of 3700, most steel traders will gradually cut their storage with high probability.
Sources: AISI, Bloomberg, OECD, International Trade Administration, Guardian, Statistic Bureau of China, Caixin, World Steel Association, China Iron and Steel Association
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