Indicators to track steel demand
It’s also very important to understand where all steel is used, both in terms of category and geography. China’s the single most important factor as far as incremental seaborne trade is concerned—accounting for 65% of it. Apart from its domestic production, it consumes 50% of the rest of the world’s production.
Economic growth – Incremental demand for any commodity is driven by the level of economic growth of the overall economy.
Urbanization and industrialization – Economic growth for a particular economy might slow after a point, but if urbanization and industrialization trends continue, then demand for metals will be structurally strong.
Demographics – Favorable demographics like high and increasing gross domestic product (or GDP) per capita, higher labor force participation rate, and a greater proportion of younger population, are structural trends showing improved demand for commodities needed to lead a comfortable life.
Though these indicators can be tracked for any economy, but since China is the single most important component for overall and incremental demand, we’ll discuss these in the context of China:
- Purchasing managers index (or PMI) – It tracks the performance of the manufacturing sector.
- Fixed asset investment (or FAI) – China’s recent policy shift of more sustainable domestic consumption led growth has led to FAI growth slowing down.
- Liquidity environment – Tighter credit conditions exacerbate the oversupply situation in the market.
- New property construction, housing sales – Since real state consumes the biggest chunk of steel production, ~50%, it’s very important to track its direction.
- Iron ore port inventories – Port inventories are building up which reflect over-purchases and lead to weakening of demand in the future.
Most of these indicators are published monthly, while some others are reported weekly or quarterly. These should be looked at collectively because they show the direction of iron ore price and ultimately share prices of companies like Rio Tinto (RIO), BHP Billiton (BHP), Vale (VALE), Cliffs Natural Resources (CLF), and the iShares S&P Global Materials Sector Index Fund (MXI).