Downgrading Chinese Steel Demand in 2016

Date: 2015-09-23

The weak Chinese domestic steel market has sent waves across both the Iron ore and Coking Coal markets. Not only has weak domestic steel demand led to imports being either down year on year in the case of coking coal or flat in the case of iron ore, but increasing Chinese exports of steel and coke have displaced production around the world. As an example, increasing steel exports have displaced domestic output in the US, and increasing coke exports to Japan have displaced coking coal imports. These imports are due to two reasons; excess Chinese capacity is being exported, but in many instances Chinese raw material production has become far more competitive, and is now more willing to compete against the more traditional suppliers in order to retain and win market share. We would, however, argue the Iron ore supply side has adapted far quicker to these challenges than the coking coal market. But it does boil down to China’s disadvantaged position in iron ore versus coking coal, which, in our view, makes the structure of the iron ore market more attractive versus coking coal.

Chinese demand and supply as a percentage of global output (2015E)
We estimate that apparent steel demand in China is down 2.9% year to date, which equates closely with our revised estimate for the full-year of -2.1% and underlying demand down -3.3%. An increase in exports means that production is roughly flat year on year. We continue to think that the residential construction sector will be the catalyst to spark a recovery in the Chinese steel sector. However, we expect the recovery to be more muted that previously forecast. Our revised forecast for 2016E underlying demand is now +0.8% versus +2.5% previously. We forecast the recovery to extend through to 2017E, with underlying demand up 1.3%.(Deutsche)

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