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How China’s Steel Production Outlook Could Affect CLF

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Iron ore demand

To a large extent, seaborne iron ore demand depends on demand in China, which consumes more than two-thirds of the seaborne-traded iron ore. China’s iron ore imports are a direct indicator of its demand, and the outlook for steel production in the country determines the future demand for ore.

In this part of our series, we’ll take a look at China’s iron ore imports and steel production outlook.

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China’s iron ore imports

China’s iron ore (COMT) imports for May recovered from April’s six-month low to total 91.5 million tons. April’s imports amounted to 82.2 million tons. May’s imports represent a year-over-year (or YoY) gain of 5.5%. April’s shipments were most likely impacted by weather-related issues in Australia.

However, Australia’s iron ore exports hit a record high in May, which could translate into higher imports in June.

China’s steel production outlook

China’s steel production has sustained its strong momentum into 2017. Chinese steel mills are churning out higher volumes to take advantage of higher margins prevailing in the market.

After hitting record production of 72.8 million tons in April, China produced its second-highest steel volume of 72.3 million tons in May. This trend reflects 2.5% YoY growth. Year-to-date, its production has risen 3.6% YoY.

China’s steel industry is suffering from overcapacity. As long as these prices remain attractive, these volumes are expected to remain firm.

Iron ore inventories at Chinese ports are hitting one record after another. According to SteelHome, inventories stood at ~141.5 million tons for the week ended June 23, 2017. The inventory-to-steel production ratio is also inching up and stands at ~1.9x.

The above factors could result in lower iron ore imports from seaborne players such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).

In the next article, we’ll look at some other indicators of Chinese steel demand.

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