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Why China Is Churning Out More Steel This Year

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China

Previously in this series, we looked at China’s steel demand indicators. It’s also important for investors to look at the supply side of the equation. In this part of the series, we’ll explore how much steel China (FXI) produced in May.

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May steel production

The graph above shows the trends in China’s monthly steel production. China produced 70.5 million metric tons of steel products in May 2016, according to data released by China’s National Bureau of Statistics. This represents a YoY (year-over-year) increase of 0.8%. This is the third straight monthly increase in YoY steel production. Prior to this, Chinese steel production fell YoY in January and February. This was preceded by a 2.3% YoY decline last year. Notably, last year marked the first time since 1981 that Chinese steel production contracted on a YoY basis.

What this means

For investors, higher Chinese steel production is not a cause of worry if that production stays in China and is consumed domestically. However, Chinese steel demand indicators were not that great last month. The end result is China’s supply and demand gap, which prompts domestic steel companies to export their excess production to overseas markets. Steel companies including ArcelorMittal (MT), POSCO (PKX), and Gerdau (GGB) are negatively affected by rising Chinese steel exports.

The Chinese government has reiterated its commitment to cut excess steel capacity. Rising Chinese steel exports are leading to trade friction with China’s major trading partners including the United States and Europe (DBEU).

However, we have yet to see a slowdown in Chinese steel exports, as we’ll explore in the next part of this series.

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