[SMM Analysis] Weighing the Benefits of Domestic Steel Price Increases Against the Loss of Export Market Share

Since July, amid the hype surrounding "anti-rat race" competition, domestic ferrous metals prices have experienced a sharp rise, with China's export prices once surpassing those in multiple overseas markets.

Source: NBS, SMM

In the short term, domestic ferrous metals prices have surged, while overseas steel prices have remained stable or declined, leading to a strong wait-and-see sentiment among domestic and overseas enterprises. Exporters have faced difficulties in taking orders. According to an SMM survey of 21 exporters, export orders in the first week of August have halved compared to the peak in June.

Looking ahead to August, it is expected that the downside room for total exports will be limited, with a decline of less than 10%. On the one hand, according to an SMM survey, the planned export volume of HRC from 39 steel mills in August is 964,000 mt, a decrease of 146,000 mt from the actual exports in the previous month, representing a MoM decline of 13.2%. However, traders have reported that shipment volumes for August are expected to remain stable, suggesting a relatively small decline in exports for the month.

Source: NBS, SMM

Considering that the export order cycle is approximately 1-2 months, it is expected that the export pressure for September shipments will be more pronounced, and exporters need to step up their efforts to secure September orders.

The "data flat control" target for H1 has been achieved, and steel mills have shown insufficient willingness to voluntarily cut production in the short term.

In the short term, there have been no confirmed cases of production restrictions due to the military parade. Hot metal production in August has shown a slight downward trend. Considering that the market has already factored in production restrictions and the loss of export orders, if there are no substantial production cuts, steel prices will fluctuate considerably from August to September. The competition among domestic demand peak season conversion, export order decline expectations, and production changes will become more complex.

However, by the year-end, some steel mills may voluntarily implement "annual actual flat control" measures, which will help alleviate supply pressure.

Source: NBS, SMM

 Under the development trend of Chinese steel exporters "strategically going global,"

product/channel diversification will ensure the stability of low-price export volumes.

Reviewing export volumes in H1, the significant growth in total volumes far exceeded market expectations. The core reason lies in the substantial increase in the number of Chinese exporters. Driven by medium and long-term strategic global expansion, products and channels have been diversified worldwide. Anti-dumping measures are unlikely to shake China's export "capacity" within one to two years. At the global "low-price" level, China's total export volumes are secure, and future support for ferrous metals price declines can be anchored to export price spreads.

Balancing domestic price increase gains with export share losses - maximum monthly export loss of 2.5 million mt by year-end

Reviewing the history of China's export volumes and domestic-overseas price spreads, it can be preliminarily concluded that China's total export volumes are more sensitive to the Black Sea price spread.When the Black Sea price spread is ≤ -30 (such as in 2016 and early 2017), it is necessary to be vigilant about a rapid decline in export volumes. Currently, the spread fluctuates between -15 and -30. Assuming overseas prices do not rise, a 10% increase in China's prices may lead to an approximately 17.5% decline in exports, reflecting the current export price spread compared to September export expectations. Considering that overseas prices also have room to rebound by the year-end, SMM believes that the actual export pressure will be within 1.5 million mt.

Key market price spreads VS China's steel export volumes

Source: SMM

Reassessment of the impact of anti-dumping on China's exports:

When the impact of anti-dumping exceeds 30% of the total export volume, the probability of a significant impact on the total volume increases.

If total export loss = case-related loss + non-case-related loss × hedging multiplier; the 30% threshold essentially represents the inflection point from quantitative to qualitative changes in trade friction. Currently, the proportion of China's export cases accounts for 15% of the total exports, leaving significant room for hedging. In the future, it is necessary to pay attention to factors such as case concentration, product coverage, and political pressure indices to estimate the impact of anti-dumping measures.

Source: SMM

Summary: From August to September, prices will fluctuate based on the extent of production restrictions. By the year-end, ferrous metals prices still have upward drivers.

In the short term, rumors of "anti-rat race" competition have led to price increases, but export orders have already been partially sacrificed, while supply has not effectively decreased. Ferrous metals prices may fluctuate from August to September. In the medium and long term, production restrictions will drive further improvements in domestic balance, strengthening China's steel prices and steel mill profits.

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