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Should Iron Ore Investors Brace for More Downside?

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Part 6
Should Iron Ore Investors Brace for More Downside? PART 6 OF 10

Can China’s Steel Production Keep the Pace?

China’s steel production is going strong

China (FXI) (MCHI) produced 808.4 million tons of steel in 2016. It produced 72 million tons of steel in March 2017, which is a monthly record. It implies a growth of 1.8% YoY (year-over-year). March’s rise was China’s 13th straight monthly YoY rise in steel production. The previous monthly record was 70.7 million tons of steel production in March 2016. In 1Q17, production was up 4.6%, at 201.1 million tons.

Can China&#8217;s Steel Production Keep the Pace?

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Fall predictions

The main concern now is that China’s production is rising faster than the country’s demand. Market participants are worried about an oversupply pressuring prices. Many market participants are now expecting volumes to fall in 2017. Hebei, China’s main steel-producing province, announced a ~32-million-ton cut in its steelmaking capacity in 2017.

China has been reeling due to 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 in 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.

Capacity cuts and the steel industry

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 should support iron ore prices. Such a development would also be positive for miners (XME) such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF). In the next part of our series, we’ll take a look at steel prices in China.

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