A rising tide of cheap steel exports from China continues to take its toll on the global steel industry, with ArcelorMittal’s South African unit announcing the closure of two steel mills, and a review of operations at the South African unit’s largest plant. Competition from cheap Chinese steel imports has compounded the woes of ArcelorMittal ’s South African unit, which was already suffering from weak steel demand. As per statements by the company, Chinese steel imports are priced around 25% below local production costs for steel in South Africa. Competition from cheap steel imports has affected price realizations for the local steel industry and made operations unprofitable. ArcelorMittal has petitioned the South African government to raise tariffs on Chinese steel imports. The negative impact of cheap Chinese steel imports is a familiar story with the North American steel industry having already sought the imposition of anti-dumping duty on steel imports, including those from China.

Impact of Chinese Steel Exports

The Chinese steel industry is currently characterized by an oversupply situation, primarily due to a slowing Chinese economy. Chinese steel production stood at 823 million tons in 2014. Steel production in China comfortably outstripped demand in 2014, which stood at 711 million tons. Weak domestic demand has provided a sharp boost to Chinese steel exports, which rose 27% year-over-year in the first seven months of 2015. To give an indication of the scale of Chinese steel exports,these stood at 67.13 million tons in the first seven months of 2015, which is comparable to the total steel output during the same period from Japan, the world’s second largest steel producer.

The competition from steel imports, including Chinese imports, has negatively impacted the price realization for the North American operations of both ArcelorMittal as well as U.S. Steel, as illustrated by the chart shown above. In the backdrop of the weakness in demand for steel in North America and South Africa, steel companies such as ArcelorMittal are in dire need of regulatory support in the form of imposition of higher tariffs on Chinese steel imports. With the weakness in Chinese demand for steel persisting, exports of steel from China are expected to remain fairly robust. Thus, in the absence of regulatory intervention, Chinese steel exports are likely to exert downward pressure on price realizations and earnings for steelmakers.