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How China Could Affect the Steel Industry’s 4Q16 Outlook

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Capacity cuts

Because China is the world’s largest steel consumer, it’s important for investors in companies such as U.S. Steel (X), ArcelorMittal (MT), POSCO (PKX), and Gerdau (GGB) to keep track of the Chinese steel industry.

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Demand has weakened

One factor that’s helped the rally in metals and mining shares (GNR) in 2016 has been the improvement in China’s economic indicators. China’s property market saw a rebound this year due to its government’s stimulus measures. However, the impact of these stimulus measures has been fading. The Chinese government has also tightened homebuying regulations in a bid to control rising property prices.

We’ve seen moderation in Chinese real estate activity after a big spike earlier this year. However, the country’s automotive sales have been strong, as buyers seem to be making the most of the country’s sales tax cut. You can read more about China’s recent economic indicators in China’s Real Estate Indicators Continue to Fall in August.

Capacity curtailments

Despite China’s commitment to cutting excess steel capacity, we haven’t seen much traction on that front. As the country’s steel demand shows signs of wearing out, we could see a rise in Chinese steel exports if production levels aren’t cut commensurately. Higher Chinese steel exports put pressure on international steel prices. Production curtailments by China could also support Chinese steel prices.

Chinese steel prices affect steel prices all over the world. Higher Chinese steel prices tend to put a floor under international steel prices. Notably, China isn’t a major exporter to the United States, accounting for only about 2% of US steel imports in July 2016. However, there are allegations that China is transshipping some of its excess steel to the United States through Vietnam.

Gradually rising steel imports has been a challenge for US steelmakers. In the next article, we’ll see how steel imports could shape up in 4Q16.

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