“The mills in China have been consistently overproducing. The major reason for this is the strong profitability of the industry – the price of both the ingredients (iron ore, coal, freight, fluxes etc.) and the finished steel has decreased, but the costs of producing a ton of steel fell more, so the profit margins have actually improved.
“For overproduction, steel is either stockpiled or it is exported. A quick look at the inventory numbers (nominal or seasonally adjusted) reveals that steel has actually been drawn out of stockpiles, not added. Hence we are left with the export option.
“The conditions for strong exports of Chinese steel have been favorable due to a weak Chinese steel price relative to the other Asian benchmarks.
“Since we expect that: 1) the Chinese economy will continue to grow (cumulative GDP in current prices), 2) the export arbitrage is not showing any signs of contraction and 3) imports of steel will remain steady at about 1.2 million tons-per-month, we can safely assume that steel exports of 7.2 million tons-per-month and therefore a net trade balance of about 6 million tons-per-month will be around for a while.”
Source: Resource Investor
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