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Do China Steel Exports (and US Imports) Drive Iron Ore Price Increases?
May. 12th, 2010
The other day I wrote a post discussing whether or not an iron ore surcharge applied by US domestic producers was justified. Our conclusion? Not exactly based on the make-up of the domestic market with 50+% of production using electric arc furnace making methods (some state that number is now over 60%) vs. China’s 9.1% and the fact that one of the US’ largest integrated producers is largely “self-sustained” from an iron ore perspective (US Steel). We estimated their market share at 25%. But one way the US can’t remain immune to rising iron ore costs involves steel imports from China. Let’s take a look at the numbers.
As we reported in the earlier piece, China will produce 612 m metric tons of steel, up by over 22% from 2009, according to the World Steel Association (we’ve seen other reports of China production reaching 675m metric tons this year). China produced 500.5 m metric tons in 2008. In 2009, China produced 567 m metric tons. Though China’s steel exports by dollar value and volume to the US appear much smaller then say Russia, Japan’s or Canada’s, check out some of these latest statistics according to trade publication Steel Home “April Chinese finished steel exports surged to 4.31 million tonnes (mt) last month, up some 29.4% sequentially as well as 205.7% from year-ago April levels. Finished steel imports actually declined in the month, down some 8.0% from 1.63mt to 1.5mt. Net finished steel exports rose to 2.8mt in the month, up 65.3% from March and 1438.1% from year-ago levels, for the highest monthly posting since October 2008.”
Clearly all that cheap money sloshing around in China has found its way into the hands of state-owned (and/or privately held) steel producers. Excess capacity is exported. Is this good for US buyers? One may think so from a short-term perspective but let’s look at it in a different way. Chinese producers, known to be less efficient than Western producers (that 90+% of China production comes from integrated steel production methods, many relying upon aging and antiquated equipment) are “buying up” iron ore, causing prices to rise, only to turn around and export the excess finished products to undercut Western producers. And though we have attempted to make a case that much of the domestic US steel industry should not be affected by rising iron ore prices, at least 25% of the US market may still face rising prices. So here is a thought for you to consider – by buying China steel products, are US buyers actually helping fuel rising iron ore prices?
Meanwhile, the trade deficit will likely increase from $39.7b in February to $41b in April, according to University of Maryland Smith School of Business Professor Peter Morici. Morici makes several additional claims including: “At 3.5 percent of GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obama’s stimulus package adds to demand,” as well as, “Unemployment would be falling rapidly and the U.S. economy recovering more rapidly but for the trade deficit with China and Beijing’s currency policies.” Stuart touched on some of these arguments in his earlier post today. And we remind steel buyers that the US currently faces a $6.3b steel trade deficit.
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