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Steel Production Cuts in China Impact Seaborne Iron Ore Prices

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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 the proper context of the drivers for iron ore demand.

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China’s crude steel production declines

Along with global steel production, China’s steel production also declined by 1.6% year-over-year on a year-to-date basis, through May 2015. May’s production came in at 69.95 million tons.

Chinese (FXI) steel mills have curbed some of their steel production due to tightening margins as iron ore prices remain above $60 per ton, even when steel prices are declining. Steel prices in China are at a 12-year low. 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 1.1% decline.

A decrease in China’s crude steel production impacts 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 the international division of Cliffs Natural Resources (CLF). On the other hand, as China’s domestic steel consumption remains low, it is diverting its excess capacity toward the US and other markets. This in turn hurts US steelmakers and ultimately raw material suppliers like Cliffs Natural Resources.

To take a broader approach toward investing in the steel sector, investors can consider the SPDR S&P Metals and Mining ETF (XME). Cliffs Natural Resources makes up 3.2% of XME’s holdings.

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