CHINA’S leaders want to move the world’s second-largest economy away from exports. But, for its steelmakers, this is turning out to be a bumper year.

Exports of steel from China were a record 8.52m tonnes last month, an increase of 73pc from a year earlier, according to customs data.

Hit by slowing domestic demand, tighter environmental regulations and debt loads that are becoming harder to repay from domestic sales, China’s steelmakers are looking to export their way out of trouble.

But their action could trigger a backlash in the US, which recently approved anti-dumping measures against South Korea and other producers of steel pipes, as well as in Europe, where a steel industry case was filed in mid-May.

As domestic demand falters, producers are taking on highly sensitive markets such as the US

The industry is ‘mired in overcapacity’, said China’s customs spokesman Zheng Yusheng at a briefing in Beijing during the release of export data this month. Prices for steel in some parts of China are as low as the price of cabbage.

Although most of China’s exports are directed towards Asia rather than Europe, there is a knock-on effect on prices and global steel trade flows.

“The US steel industry is facing a very sizeable increase in imports from around the world,” says Kevin Dempsey, senior vice-president of the American Iron and Steel Institute. “We’re seeing some signs of improvement in the US economy and it seems that all of the growth in steel is being taken from imports, including that from China.”

The exports are driven by a state-owned industry focused on output rather than price, says Mr Dempsey. Removing government intervention in the industry ‘is an important goal that we should be pursuing,’ he adds.

“As the Chinese economy has slowed they are looking to export the steel that they can’t sell domestically and that’s disrupting markets around the world.”

This is being reflected in the market place. Global steel prices have fallen 7pc since January, according to an index run by London-based metal consultancy CRU. Falling global prices for iron ore, the main ingredient in steel, have also lowered costs for mills and allowed them to sell steel more cheaply. “Chinese exports are at record levels and global steel demand on a regional basis is nothing like record levels,” says Mike Shillaker, managing director of global steel and European miners at Credit Suisse.

So far US prices have held up relatively well, but if they fall further there could be more vocal complaints about China, Mr Shillaker says. US hot rolled coil prices have fallen 5pc since the start of the year, while prices in Europe have dropped 13pc. In China they have dropped 17pc.

Overall the difference between US steel prices and global prices is the widest in more than 40 months, according to data from Bloomberg.

Macquarie, the investment bank, estimates that US net steel imports rose 66pc year on year between January and August, and that has led the industry and unions to press the government for action against a range of countries, such as Mexico and South Korea.

The US steel industry has long been politically sensitive and China and US have a colourful history of trade battles over the metal. But a fresh battle lies ahead. The surge in Chinese imports led to the launch this year of several US anti-dumping investigations, which are expected to climax next month and lead to the imposition of punitive tariffs.

In May the US Commerce Department issued a preliminary finding that Chinese producers were selling grain-oriented electronic steel in the US below cost. US agencies have also accused Chinese producers of dumping everything from steel wire and rods to ‘boltless steel shelves’ on the US market.

“The US steel producers are very on the ball when it comes to protecting their domestic market,” says John Kovacs, steel analyst at CRU.

Yet Chinese exports are hard to target because they mostly go to the southeast Asian markets or Mexico, from where some of it makes its way to the US, says Colin Hamilton, an analyst at Macquarie. The imports have also displaced steel from Japan and Korea in those regions, he says.

There are signs that China is taking measures to deal with the overcapacity. It may withdraw the rebate tax given to exports of some steel products, according to Mr Hamilton.

That would be a bitter pill to swallow for China’s local governments. Steel mills are required to maintain production because local authorities need to keep cash circulating amid heavy debt loads, according to Anne Stevenson-Yang, co-founder of Beijing-based J Capital Research. The collection of VAT on the sale of the steel is their principal revenue stream, she says.

“Production also keeps other companies in business: it doesn’t really matter if the mills don’t pay them for their coal or ore. If the mines are racking up receivables, those are assets that can finance debt at a bank.”

Published in Dawn, Economic & Business, October 27th, 2014