Could China’s Buoyant Steel Production Support Iron Ore Prices into 2018?
China’s steel production
China (FXI) (MCHI) experienced another month of record steel production in July 2017. Chinese steel production has been setting one record after another. June 2017’s production also set a monthly record of 73.2 million tons of steel.
China raised the bar further in July by producing ~74.0 million tons—the 17th straight monthly year-over-year rise in steel production for China. Its production in the first seven months of the year is trending at 492.0 million tons, 5% higher than the same period last year.
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China’s crackdown and the steel outlook
Chinese authorities have cracked down on the illegal steel capacity in the country, which has led to a number of shutdowns. This action gave a new lease on life to China’s existing steel mills, which are working at higher capacity to fulfill the steel requirements as demand remains robust.
July’s production was 10.3% higher year-over-year (or YoY). Because the peak demand seasons of September and October are still ahead of us, we can expect more upside to steel production in China in the coming months.
Capacity cuts and the steel industry
China’s official steel-producing mills must now comply with stricter environmental standards, which has already started impacting the demand patterns for these mills. These mills are now demanding higher-grade iron ore, which causes less pollution when fed to the mills.
This is a positive development for high-grade iron ore–producing companies (XME) such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), and Vale (VALE). Fortescue Metals Group (FSUGY), on the other hand, produces sub–62% iron ore, which attracts a huge discount compared to the benchmark prices.