Chinese Crude Steel Production Takes a Break

China accounts for about half of global steel production and is the world’s biggest buyer of seaborne iron ore. Iron ore is the main ingredient in steel manufacturing, and China is the largest producer and consumer of the two commodities.

Due to the impact of the Chinese New Year holiday, official authorities combined output data for the first two months of the year to avoid skewing it.

In the first two months of 2015, China’s crude steel output dropped 0.21% year-over-year to 130.5 million tons, according to government data. Excess supply and slower demand growth led mills to bring forward scheduled maintenance and curb output.

In a report by Reuters, Cao Yang, an analyst with Shanghai Pudong Development Bank in Shanghai, said, “A slower economy has hit production in power-intensive sectors such as steel. And a weak property market has also piled pressure on steel demand.”

Dragged down by overcapacity and slowdown, steel prices lost 28% during 2014. Industry sources expect more inefficient steel mills to shut down in 2015 given tougher environmental laws.

According to China & Iron Steel Association estimates, more and more mills in the country are likely to shut down. So, steel production in China is expected to fall to 814 million metric tons in 2015, down from 823 million tons in 2014. Declining steel production may also hurt iron ore prices.

Dry bulk shipping companies such as Safe Bulkers (SB), Navios Maritime Holdings (NM), Diana Shipping (DSX), and DryShips (DRYS) may be affected by a slowdown in production. Likewise, so might the SPDR S&P Metals and Mining ETF (XME), which invests in industries such as steel, coal and consumable fuels, gold, precious metals and minerals, aluminum, and diversified metals and mining.