Tracking steel production
Since 98% of mined iron ore goes into making steel, it’s important to track steel production. This helps decipher trends for iron ore demand. China consumes two-thirds of seaborne iron ore. As a result, tracking China’s steel demand is a must for investors who want to understand what drives iron ore demand.
China’s crude steel production
The WSA (World Steel Association) reports China’s crude steel output on a monthly basis. According to the data released on May 25, China’s crude steel production for April was 68.9 million tons. This was a decline of 0.7% YoY (year-over-year). Also, China’s production has declined by 1.3% YTD (year-to-date) compared to the same period last year.
For several years now, China (FXI) has been producing steel in excess of its domestic demand. This overproduction has led to an increase in steel exports.
In contrast, this is positive for seaborne iron ore players like BHP Billiton (BLT), Rio Tinto (RIO), Vale SA (VALE), and Fortescue Metals Group (FSUGY). However, it’s negative for players like Cliffs Natural Resources (CLF)—it supplies the bulk of its iron ore to the US. As the US imports more steel from China and elsewhere, domestic producers like U.S. Steel (X), AK Steel (AKS), and Nucor (NUE) are negatively impacted.
Going forward, trade cases launched against China should lead to a slowdown in its steel exports. This would be negative for iron ore miners. Miners are already grappling with low steel consumption amid increasing supply.
Steel production outlook
This year, the China Iron and Steel Association expects Chinese steel consumption to drop 6% YoY. A decrease in China’s crude steel production would impact the iShares MSCI Global Metals & Mining Producers ETF (PICK). All of the listings of BHP Billiton, Rio Tinto, Vale, and Fortescue Metals Group form 34.1% of PICK’s holdings.
To take a broader approach towards investing in the steel sector, consider the SPDR S&P Metals and Mining ETF (XME). Currently, U.S. Steel forms 4% of XME and 0.22% of the SPDR S&P Midcap 400 ETF (MDY).