Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

If China's steel producers are casting around for something to worry about, they need look little further than the share prices of their U.S. rivals.

Big League
Share prices of the big U.S. steel companies loved Trump's election win
Source: Bloomberg

U.S. Steel Corp.'s 17 percent jump on Wednesday was the stock's strongest gain since March and the sixth-biggest in 25 years of trading. Nucor Corp.'s more modest 12 percent advance was still its best result in more than seven years.

Though Donald Trump has never been averse to buying Chinese metal for his construction projects, his rhetoric promises a different approach as president. Trump's pledge to use executive power to crack down on "foreign trading abuses," not to mention his retention of Nucor's former chief executive Dan DiMicco as a trade adviser, will all close the door to Chinese imports a bit further.

Thin Plate
It's a struggle to even register China's steel exports to the U.S. next to the broader industry
Source: China Customs General Administration, China National Bureau of Statistics, Bloomberg

Still, the real problem for Chinese steel lies closer to home. Even at their peak in 2014 and 2015, exports to the U.S. were barely more than a rounding error. The country accounted for about 2.3 percent of China's steel exports on average over the past five years.

Much more worrying is what's happening in domestic markets. The profitability of local mills hit its best level in at least seven years in April, thanks to raw-material costs that were on the floor and a surge in demand from China's construction-led stimulus. Both of those factors have since reversed, while fundamentals may be looking better for some competitors in richer countries.

Take materials. The world's best-performing major commodity has been hard coking coal, a precursor to the coke that's added to blast furnaces to provide heat and carbon to strengthen steel. Iron ore, the other main blast furnace ingredient, is up 63 percent, and has climbed 9.2 percent this week alone.

Material Costs
The prices of materials for blast furnaces have surged over the past year, while those for arc furnaces look steadier
Source: Bloomberg
Note: Figures have been rebased. Nov. 10, 2015 = 100.

That's unfortunate for China, which is overwhelmingly dependent upon blast furnaces. In the U.S., by contrast, about 63 percent of output comes from electric arc furnaces, whose core ingredients of scrap and electricity have seen quite different cost trajectories. Rotterdam shredded scrap is 35 percent more expensive this year, and electricity prices for industrial users have gained 6.6 percent.

As a result, a Bloomberg Intelligence model of profitability for local mills dropped back into losses in September and October, before recovering to a meager 110 yuan ($16) per metric ton this month.

Space Saver
The floor area of buildings under construction in China continues to dwindle
Source: National Bureau of Statistics of China, Bloomberg
Note: Data not available for January.

The next shoe to drop will be demand. The floor area of Chinese buildings under construction in September grew just 3.2 percent -- the weakest pace this year and barely ahead of the 3 percent figure 12 months earlier, when commodity markets were cratering. 

International trade has never been key to China's metal industry, representing at best a potential escape from the worst of the country's domestic overcapacity. The new political climate in the U.S. certainly reduces the odds of exports providing a safety valve -- but the problems of China's steel industry are mostly home-grown.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net