Jefferies: Chinese steel export collapse highlighted strengthening global market

Key Takeaway
Continued sharp YoY declines in Chinese finished steel exports highlight improved supply-side discipline while low inventories and strong prices/margins further highlight market tightness. Exports as a percentage of production have nearly halved from the late 2015 peak, as exporters seek to maximise margins in a strong domestic environment rather than utilise exports as a release valve. MT is our preferred play on a tightening global market.

Sharp YoY Decline in Exports Continues. November Chinese finished steel exports of 5.4Mt continue to highlight a trend of sharply lower export volumes. The November figure, although +7% MoM, was -34% YoY according to Chinese customs data released today. YTD exports are -31% and as a percentage of national production (through October) are just 9%, well below the 17% peak in late 2015. While product-specific export volume data is released with a delay, broad-based declines are seen across key products. Most notably, exports of rod and bar were down -64% YoY, angle, shape & sections -55% YoY and sheet & plate -17% YoY. Exports of stainless (October latest data) bounced +6% MoM off the second-lowest reading of 2017 though were -6% YoY. With the recently lower YoY comps for stainless, the YTD increase has decelerated to +3% through October vs a peak of +13% in June.

Inventories Have Plunged to YTD Lows. Inventories of finished steel in major Chinese cities, which increased in Aug/Sept, have since reversed course and steadily declined in the last six weeks. Early December inventories declined -4% week-on-week (WoW) and -17% MoM and are now at YTD lows. On a product basis, the decline has been primarily driven by a draw-down of rebar, -6% WoW and -35% vs early October. While HRC inventories declined -2% WoW, this more muted move highlights the stability seen through 2H17 as peak/trough HRC inventories have varied by less than 10%. Looking at the historical patterns, inventories would be expected to inflect higher in the coming weeks, though current smog-related capacity/production restrictions may limit the ability to restock. The end of year restocking cycle occurs through Chinese New Year before demand improves with stronger construction activity in the Spring. Low inventories and an inability to restock ahead of the spring construction season should continue to support steel margins in the medium term.

Import Tenders of Billet Highlight Tight Market. With China being a consistent net exporter of steel since 2006, recent reports of an attempt to import additional billet highlight a tight S/D balance being tipped by current outages. With the subsequent surge in rebar prices supporting demand for billet, traders are looking to arbitrage imported billet from the likes of India, Middle East and CIS.

Domestic Chinese Margins Continue to Surge; Some Signs of Overheating. Domestic Chinese steel prices in early December have maintained strength seen in late November which has pushed rebar prices to multi-year highs. Spot rebar and HRC prices are +63% and +20% YTD respectively. More importantly, margins remain well above historical averages with rebar margins at $407/t (avg $169/t) and HRC margins at $330/t (avg $191/t). While robust steel prices are driven by fundamentals, the most recent surge in rebar is likely also supported by speculation; we would not rule-out a pull back in rebar prices in the coming weeks, though margins should still remain well above historical average.

Preferred Positioning? MT remains our preferred play on a tightening global steel market led by rising Chinese steel margins/falling exports. In Europe, TKA and VOE stand out with defensive contract based businesses while MT and SSAB are our preferred levered plays on Euro steel. In the US, NUE and STLD offer defensive positioning while CLF, X and AKS are our preferred levered plays on domestic steel prices.

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