What China’s Steel Capacity Cuts Can Do for Iron Ore Prices
China’s steel production outlook
China (FXI) (MCHI) produced 808.4 million tons of steel in 2016. It produced 68.9 million tons of steel products in December 2016, which represents a YoY (year-over-year) rise of 7.1% in addition to November’s 4.7% rise.
Interested in XME? Don't miss the next report.
Receive e-mail alerts for new research on XME
More capacity cuts
China’s iron ore and steel futures surged after the head of China’s Ministry of Information and Technology vowed to cut the excess capacity in the country’s steel sector. China has been reeling under the overcapacity in the steel industry.
The current plan is to cut 50 million tons of steel capacity, which is higher than the target of 45 million tons for 2016. These cuts are intended to reduce pollution in the country. By 2020, China’s government aims to close 100 million–150 million tons of steel capacity.
Some market participants are now predicting falling volumes in 2017. Hebei, China’s main steel-producing province, has increased its capacity-cutting targets for 2017 after announcing a cut of ~32 million tons of steelmaking capacity in 2017.
Capacity cuts and the steel industry
According to Greenpeace, “Steel production capacity elimination in 2016 exceeded targets, with a total of 85 million tons (Mt) of capacity closed. However, three different factors undermined the effectiveness of the efforts.” These factors included the following:
- Only 23 million tons of actual operating capacity were idled, as the rest of the capacity was already closed down.
- About 49 million tons of previously idled capacity restarted due to the recovery in prices.
- About 12 million tons of new capacity were added.
If China cuts its steel capacity—which it may have to do despite its apparent reluctance—there could be better days ahead for the global steel industry.
Sustained capacity rationalization could lead to higher steel prices, which could support iron ore prices. Such a development would also be positive for miners (XME) like Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).