The third consecutive monthly fall in Chinese steel-product exports in February 2017 is temporary and the result of a short-term steel deficit caused by government policy, says Fitch Ratings.

China’s February steel-product exports were 5.75 million tonnes, 29.1% lower yoy and 22.5% lower mom. China began a crackdown on substandard steel in December 2016. This steel is known as ‘detiaogang’ and is mainly produced from scrap for construction use by small steel mills.

The government aims to eliminate detiaogang from the Chinese steel market by end-June 2017. We estimate China produced 100 million tonnes per annum of detiaogang.

In addition, the government had instated temporary steel production cuts to control pollution ahead and during China’s annual sessions of the National People’s Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC), which took place March 2017. These two policy measures led to a temporary supply squeeze in the steel market and a decline in exports.

Demand for steel remains stable, with continued infrastructure investments and rising property contract sales. We believe the fall in exports is temporary, as the NPC and CPPCC ended last week, with production control lifted, and a number of previously suspended or idled capacities have started to come back due to rising prices, particularly in long products in the past three months. In fact, China’s total crude steel production for 2M17 was 129mt, up 5.8% yoy.

We expect current steel prices to fuel additional restarts of previously idled capacities, and with already over-capacitated sector fundamentals, the market will re-adjust to the temporary deficit situation in the next three to six months. This should increase steel exports and help moderate prices.

Source: Fitch