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China’s Steel Production Outlook Pressures Iron Ore Prices

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Dec. 4 2020, Updated 10:52 a.m. ET

China’s steel production

China consumes two-thirds of the world’s seaborne iron ore. So, tracking China’s steel demand and production is a must for investors who want to understand what drives iron ore demand in the proper context.

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China’s crude steel production declines

The World Steel Association reports China’s crude steel output on a monthly basis. Along with global steel production, China’s steel production also declined by 1.6% year-over-year on a year-to-date basis. The production for May came in at 69.95 million tons.

Chinese (FXI) steel mills have curbed some of the steel production due to tightening margins as iron ore prices remain above $60 per ton, even when steel prices are declining. The property market is not picking up as expected, even after the government implemented stimulus measures to support steel demand growth.

Outlook remains negative

According to the China Iron and Steel Association (or CISA), China’s crude steel output could decline by as much as 2% in 2015. This estimate is lower than CISA’s March estimate of a decline of 1.1%.

A decrease in China’s crude steel production would impact the iron ore miners engaged in seaborne iron ore trade such as BHP Billiton (BHP) (BLT), Rio Tinto (RIO), Vale SA (VALE), Fortescue Metals Group (FSUGY), and Cliffs Natural Resources (CLF). A production decrease would also affect the iShares MSCI Global Metals & Mining Producers ETF (PICK). All listings of BLT, RIO, VALE, and FSUGY form 34.1% of PICK’s holdings.

To take a broader approach toward investing in the steel sector, consider the SPDR S&P Metals and Mining ETF (XME). Cliffs Natural Resources (CLF) makes up 4.1% of XME’s holdings.

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