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Understanding China’s Monthly Record in Steel Production

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China’s steel production—another monthly record

China (FXI) (MCHI) produced 808.4 million tons of steel in 2016. In April, China’s steel production surpassed the previous monthly record of 72 million achieved in March 2017 by producing 72.78 million tons. It implies a growth of 4.8% YoY (year-over-year).

April’s rise was China’s 14th straight monthly YoY rise in steel production. In the first four months of the year, production was up 4.6%, at 274 million tons.

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Cutting capacity

China has been reeling due to overcapacity in the steel industry. The current plan is to cut 50 million tons of steel capacity, which is higher than the target of 45 million tons in 2016. These cuts are intended to reduce pollution in the country. By 2020, China’s government aims to close 100 million–150 million tons of steel capacity.

Officials have maintained that while production is going strong, the capacity cuts are taking place. The main concern now is that China’s production is rising faster than the country’s demand. Market participants are worried about an oversupply pressuring prices.

Capacity cuts and the steel industry

If China cuts its steel capacity, which it may have to do despite its apparent reluctance, there could be better days ahead for the global steel industry.

Sustained capacity rationalization could lead to higher steel prices, which should support iron ore—especially the higher grade ore. Such a development would also be positive for miners (XME) like Rio Tinto (RIO), BHP (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).

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