Chinese Steel Reform 2.0, Morgan Stanley reports

A Morgan Stanley's report released on 21 Jan 2025 explores the global implications of China's "Steel Reform 2.0," anticipated to launch in 2025. The reform, driven by declining domestic demand and rising anti-dumping investigations, aims to restructure the steel industry by reducing production by 2-3% annually. This follows the 2016/17 reforms but adopts a more measured approach to minimize GDP and employment impact. China's steel exports, currently 20% of global trade, are expected to decrease by 15-20%, potentially tightening global supply and raising prices.

Two scenarios are presented:

1. Baseline Scenario: U.S. tariffs on Chinese imports rise to 26% in 2025, cutting Chinese steel exports by 15-20%, raising U.S. hot-rolled coil prices by 10-13%.

2. Aggressive Scenario: Tariffs escalate to 36%, leading to a 4-5% production cut and export reduction of 30-40 million tons, increasing U.S. hot-rolled coil prices by 15-20%.

   
   

The reform could boost global steel producers' profitability, especially in regions like Europe, Latin America, and India, as they fill the market void left by China. Key beneficiaries include ArcelorMittal, Gerdau, JSW Steel, and Baoshan Iron & Steel. Additionally, decarbonization and stricter enforcement are expected to align with reform goals.

Historical analysis reveals that past capacity reductions significantly increased prices. For example, the 2016/17 reforms raised Chinese hot-rolled coil prices by 25-36%, with global steelmakers gaining market share and profits. The report also highlights investment opportunities in global steel equities, as current valuations do not fully reflect these developments.

Overall, China's reform is set to reshape global steel trade, offering regional producers a chance to capitalize on rising prices and tighter supply.