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June Chinese Exports Hitting New High. According to preliminary trade data published on Bloomberg Chinese steel exports jumped again in June, up some 13.8% from May, and up more than four-fold from year-ago levels, hitting 5.62 million tonnes, the highest level since just before the recession began in the fall of 2008. To put the magnitude of the increase into perspective, May Chinese steel exports were actually higher than the entire second quarter of 2009 and 2Q 2010 was up 71% from 1Q 2010.

Export Rebate Elimination/Reductions a Trojan Horse? Global steel markets reacted well to news of Chinese export rebate reductions/eliminations announced two weeks ago as players read the reductions as a sign that China is pulling back from its historic pattern of subsidizing exports in periods of oversupply as a way to maintain a more stable market domestically. But like most things, the devil is in the details – as China has pulled back export tax rebates on commodity grade steels, but actually because of the nature of VAT incremental taxation, this has essentially increased the rebates on exports of value-added steels.

June Chinese Imports into the US Jump. While we have not yet seen the complete Chinese export data sorted by destination, clearly the US took the lion’s share of the jump in the month, as Chinese steel imports into the US in June jumped 35% (based on licenses), bucking the trend of overall imports into the US declining 16.2% (ex-China). In particular we saw a jump in the imports of value-added steels from the region into the US, reflecting anticipation of the changed export tax regime. Value-added grades of sheet imports rose 23%, mechanical tube was up 23.5%, line pipe imports rose more than ten-fold from 351.3 tonnes in May to 4,120 tonnes in June, cold-rolled bar imports surged 71.4% from May and stainless steel overall was up a whopping 36% from May to the highest level in nearly two years.

Turning Gold into Straw. Chinese exports are running at new highs as Chinese steel production is on pace to hit a 20% uptick from previous all-time highs for the last year, despite steel price declines of some 10%, and cost increases close to 30%. We’re concerned that while production costs in China are surging, and Chinese steel mills claim they can’t meet the new costs, nevertheless, China is importing high-cost raw materials, adding energy and inefficient capital – and then exporting the high-cost finished product back into the West.

Production Cuts Coming? In the past few weeks there have been mounting reports coming from China of anticipated production cuts, and the Chinese steel industry’s official trade body, CISA, has “leaked” news of lowered production in June. In prior inflection points in the global steel business – 2005 and late 2008 – we had similar “leaked” production data that generally turned out to be far higher when “official” statistics were released. We believe that this year we’re seeing vastly changed economics in the region; as raw material costs continued to rise, the economics of running flat-out in a declining pricing environment became far less compelling, and rather than turn “gold into straw” we see the Chinese – like their Western counterparts are far more likely to cut production in coming weeks and months.

Disclosure: Author is long RS, NUE, CLF

Source: June Chinese Steel Exports Hit New High (Again)