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Chinese Steel Production Cutbacks Spell Doom for Iron Ore Miners

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China’s steel production

China accounts for about half of the global steel production and is the world’s biggest buyer of seaborne iron ore. China’s steel output declined by 3.1% year-over-year (or YoY) in October to 66.1 million tons. For the first ten months of 2015, production has been down 2.2% YoY to 675.1 million tons.

Steel mills are losing $50–$100 per ton on steel they are producing. Following weakness in the end consumer markets and declining steel prices, steel mills have started cutting back on production. However, even the current production cuts planned are not enough to restore balance in the oversupplied steel market.

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In the meantime, weak steel production outlook is weighing on the raw material demand. China imported 75.5 million tons in October 2015, which is 12.3% lower month-over-month. Steel exports are also not keeping pace with production, which is leading to weaker sentiment in the steel market. China’s steel exports declined by 19.8% month-over-month to 9 million tons in October.

Weak outlook

According to the forecasts by China Iron and Steel Association (or CISA), China’s crude steel output could further decline by 23 million tons to 783 million tons in 2016 from 806 million tons in 2015. In CISA’s opinion, this slump could be driven by a worsening downturn in the local demand amid opposition to exports.

Weaker end user demand is weighing on iron ore imports, which in turn is negative for seaborne iron ore players such as BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale SA (VALE), and the Asia–Pacific division of Cliffs Natural Resources (CLF). Cliffs form 0.05% of the Vanguard Materials ETF (VAW).

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