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World Steel Production Falls for Five Straight Months

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World crude steel production a key indicator

The World Steel Association (or WSA) releases data for the 65 countries that produce ~98% of the world’s raw steel. Because about 98% of the world’s iron ore goes into steelmaking, this is a key indicator for investors in iron ore companies like BHP Billiton (BLT), Rio Tinto (RIO), Vale SA (VALE), Fortescue Metals Group (FSUGY), and Cliffs Natural Resources (CLF).

The iShares MSCI Global Metals & Mining Producers ETF (PICK) has ~32% exposure to these companies. The SPDR S&P Metals & Mining ETF (XME) provides an alternate way to play this industry.

 

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World crude steel production declines

According to data released on June 22 by the WSA, world (ACWI) crude steel production totaled 139 million tons in May. This is a 2.1% decline year-over-year (or YoY). Production in every major region, including China, Japan, and South Korea, was down on a YoY basis. In the European Union, output grew slightly.

Capacity utilization ratio

In the global steel industry, the capacity utilization ratio was 72.1% in May. This is 3.4 percentage points lower than the figure from a year ago and 0.4 percentage points lower than April 2015.

Lower capacity utilization is a negative sign for the global steel industry. With a low capacity utilization rate, competition increases between existing industry players, putting pressure on steel prices. It is also negative for iron ore because steel—the fundamental in the end market—mainly drives the industry.

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