Why steel production has slowed down in China, affecting stocks

Slowdown in Chinese steel production

As we discussed in the last part of this series, Chinese steel production grew by only 1% in August. For the past several years, the growth rate in China was much higher than global growth rates. In fact, China was the global growth engine for steel companies.

Analysts expect that this year steel consumption in China will grow by a slower pace than the global average. The slowdown in August steel production is an indicator of this trend.

What caused this slowdown in Chinese demand?

The steel industry in China has witnessed a slowdown in the past several quarters. This is largely a result of a slowdown in the real estate industry in China. The real estate industry accounts for almost half of steel consumption in China.

Indicators have been pointing to a slowdown

Up until May this year, residential floor space declined 9% in China. Meanwhile, the floor space for sale increased 25%. A decline in sales with an increasing supply is a bad sign for the real estate sector. As the above chart shows, the Chinese real estate climate index has been falling.

Oversupply plagues the real estate industry in China. Images of the so-called ghost towns show the massive oversupply in China. The term “ghost town” describes the new cities developed in China, with huge buildings, shopping malls, roads, and other infrastructure. The only thing missing in these cities is inhabitants. Only a few hundred people actually live in these cities that can accommodate a few thousand people.

While steel consumption was coming down in China, production was still rising due to the export of steel from China to other countries. Steel prices are lower in China as compared to other countries.

China’s lower steel prices have negatively impacted steel companies like ArcelorMittal (MT), United States Steel Corporation (X), Nucor Corporation (NUE), and AK Steel (AKS). Some of these companies are part of the SPDR S&P Metals and Mining ETF (XME).