While the long-term consequences of Trump’s first trade war salvo launched today will become obvious only in hindsight, it may have come at an opportune moment: just as China prepares to flood the world with record amounts of steel. Overnight, the National Statistics Bureau reported that even as Beijing intensified its war on smog, local steel output “paradoxically” hit a new monthly record in July, some 74.02 million tonnes, up 10% Y/Y (or 50% more than China’s GDP) and higher than the previous record of 73.23 million tonnes set in June.
For the first 7 months of the year, total production rose to a record 491.55 million tonnes, up 5.1% over the prior year period.
As Xu Bo, steel analyst at Haitong Futures observes, while Chinese steel output normally slows during the summer months, when building construction eases off due to the heat, this year the pattern has not held “due to Beijing’s crackdown on low-end rebar and capacity cutbacks in the steel sector” which has prompted mills, spurred by rallying profits, to work with full capacity. “Steady demands from infrastructure also gave support to steel prices, which encourages mills to churn out more products,” Xu said cited by Reuters.
The Chinese commodity sector, boosted by a new wave of construction this time in Tier 2-4 cities, has been on fire in 2017 with the most-traded rebar futures contract gaining nearly 50% this year, peaking at 4,016 yuan ($603.15) a tonne last week before retreating modestly around 5%.
However, the biggest impact will be on trade, and China’s favorite pastime: dumping excess production in international markets. As Reuters correctly points out, “the data will likely fuel worries in the United States and Europe that China’s efforts to cut excess capacity in bloated heavy industry are not leading to a drop in supplies, which foreign rivals say are flooding international markets.” In the past, this has resulted in sharp tariffs imposed by the US on Chinese exporters, and this time won’t be any different, only it will take place in the context of a belligerent trade standoff.
Meanwhile, China has been pushing to clean up its inefficient manufacturing sectors for years as part of its war on smog and supply-side reform.
This year it has sought to curb output of low-grade steel like rebar used in construction, leading to a surge in prices as investors bet on tight supplies.
Of course, just like with US shale producers, the surging prices promptly sparked the return of domestic producers, and allowed steel mills to expand plants if they comply with stricter environmental standards, which has offset much of the capacity reductions. And now, with Chinese steel inventories back to an all time high “square one” thanks to a glut of steel and other commodities, it will either have to build more ghost cities or it will dump the excess production in international markets, unleashing further trade wars around the globe.