Must-know: Why China’s steel production growth has begun to wane

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Steel production

It’s important to track steel production to decipher trends for iron ore demand since 98% of the iron ore mined goes into producing steel. Also, China consumes two-thirds of the seaborne iron ore, which makes tracking China’s steel demand a must for investors who want to get the iron ore demand drivers right.

China crude steel production

The World Steel Association releases China’s crude steel output on a monthly basis. The data showed that China’s crude steel production for July was 68.32 million tons, up 4.4% year-over-year (or YoY) but down 1.4% month-over-month.

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Production for the first seven months of the year was 478 million tons, a 5.5% increase YoY. The daily production rate was 2.2 million tons, down 4.6% from the record daily rate of 2.3 million tons in June. The number was within market expectations, as China and recent initiatives by the government—like providing stimulus and relaxing property laws for the construction sector—should support the steel production going forward.

But it’s still not expected to absorb all the excess supply building up in Australia and Brazil. So this puts a downward pressure on iron ore prices as more supply hits the market.

China domestic steel price vs. iron ore price

Steep fall in steel prices

Chinese domestic steel prices are also declining as is evident from the chart above. They declined 11.3% YoY in August and came at CNY (or China Yuan Renminbi) 3251 per ton, down ~3.2% month-over-month. As will be discussed in a later part of this series, the cooling down of the property market is the major reason for this decline in recent months.

The above data points show that Chinese steel production growth has started declining, along with decreasing steel prices. Since a bulk of the iron ore produced by companies like Rio Tinto (RIO), BHP Billiton (BHP), Vale SA (VALE), and Cliffs Natural Resources (CLF) goes to China and most of it is used in steel production, negative steel market dynamics are negative for iron ore, these players, and ETFs investing in these companies like the SPDR S&P Metals and Mining ETF (XME).

To read more about the iron ore industry and the iron ore players, see Market Realist’s series Must-know: An overview of the iron ore industry.

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