While China was in 2017 by far the biggest steel producer in the world, with the output of 832m tons, according to data from World Steel Association, most of its production is used domestically, and only around 9% of it is exported. South Korea, Vietnam and the Philippines are China’s biggest customers, according to a recent report from US Department of Commerce. Only 0.1% of its production was exported to the US.
The report further notes that President Trump’s steel tariffs would add to the 16 anti-dumping duties and 12 countervailing duties that the US currently imposes on China’s steel producers, by far the biggest number in the world.
The situation is similar with aluminium. China is the world’s largest producer of the metal and exports around 7% of its output but only 1% of it to the US, according to analysis by Andy Rothman of Matthews Asia.
As other countries much more affected by the tariffs, such as as Canada, Brazil, South Korea or those in the European Union, react with their own trade measures, the global stifling of trade is likely to reduce growth and thus indirectly impact China’s other sectors, according to analysis by ING. However, the country could also benefit in the long-term from steel-dependent manufacturers moving their production capacity out of the US to Asia.
In the meantime, depending on how the tariffs are implemented, China might retaliate by curbing imports of soybeans from the US, speculates Rothman, “in the hope that Midwestern farmers will mark their displeasure at the ballot box in November’s mid-term elections”.
The outlook for China’s steel manufacturers, albeit not likely to be affected by the US tariffs, is not rosy, according to Ken Foong, analyst at Morningstar. The country’s steel industry has been suffering from overcapacity. Although in 2016 and 2017 it shut down around 115m ton steel production capacity, some of it is likely to be replaced by electric arc furnaces, a flexible technology suitable for the processing of scrap metal.
As scrap steel becomes increasingly available in China, “the overcapacity issue may come back in the long term”, Foong told FSA. “That’s why we are bearish on the sector and rate the steel manufacturers, [such as Baoshan Iron & Steel and Angang Steel] as overvalued.”
Mutual funds with holdings in China’s top steel companies
|Harvest Asia Frontier Equity||Angang Steel||2.95%|
|First State Global Bond||Baoshan Iron & Steel||2.40%|
|Invesco Asia Infrastructure||Baoshan Iron & Steel||2.86%|
|Invesco Asia Opportunities Equity||Baoshan Iron & Steel||3.51%|
|Invesco China Focus Equity||Baoshan Iron & Steel||3.40%|
|Invesco Greater China Equity||Baoshan Iron & Steel||3.04%|
Data: FE, 28 February 2018