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China Steel Imports Should Slow

While Chinese imports into the United States jumped 20% in November, overall import levels declined 15% in the month, supporting the view that China's imports should slow as well.

NEW YORK (

TheStreet

) --

Summary:

While Chinese imports into the United States showed a meaningful 20% jump in November, overall import levels declined 15% in the month due to weaker pricing in the United States and elimination of the normal premium into the U.S. market. Given the 5% decline in November steel production in China as well as the increasing pressure from virtually all of China's steel trading partners, we are cautiously optimistic that this pickup won't be continued. Supporting our view is a continued near-record low pricing in the United States so that the economic logic of importing into this country is somewhat suspect.

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Background:

While November preliminary imports fell 15% to 1.32 million tons (mt) from 1.56 mt in October, there was a meaningful pickup in Chinese imports, which rose 20% in the month. The jump was more than offset by declines from other regions, including Europe, which was down nearly 30% and the NAFTA region, which dropped 20%. There was a drop in imports for most products, with the largest tonnage decline for wire rod, falling nearly 50% to 64,154 tons after rising 55% the prior month.

We are hopeful that this uptick from China will be the last pickup we'll see for a while as pressure from virtually every global steel trading partner on Beijing seems to be having some impact - albeit modest. Chinese production declined in November for the first time in a year. We are hopeful to see further output cuts moving forward amid rising raw materials costs and high inventories. This will hopefully stem the tide of surging Chinese exports providing relief to domestic steelmakers.

We had expected imports to decline following an 11% drop in total import licenses in November which is resulting from far weaker pricing in the United States than comparable global peers, particularly including transportation costs. So for the most part import pricing isn't sufficiently attractive for domestic buyers. There is a structurally "permanent" amount of imports used in this country - in part due to the dominance of foreign-owned trading and distribution companies that serve as outlets for foreign mills. So we believe that despite the pricing differential, imports are probably as low as they're going to get.

Written by Michelle Applebaum.

Michelle Galanter Applebaum spent more than 20 years as a managing director at Salomon Brothers in New York and was the No. 1-rated steel analyst from 1988-2003, according to Institutional Investor magazine. In 2003, Ms. Applebaum formed Steel Market Intelligence, a 5-person Chicago-based equity research boutique providing advisory services to institutional investors. In addition to publishing 10-15 reports/week, Ms. Applebaum sponsors numerous CEO-level meetings for her investor clients during the year. She is regularly quoted on Bloomberg, Dow Jones, The New York Times and makes frequent appearances on CNBC and other news programs. Ms. Applebaum lives near Chicago with her husband, visiting children and 2 dogs.