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Does China’s Steel Production Outlook Bode Well for Iron Ore Prices?

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China’s steel production

China’s (FXI) (MCHI) steel production is setting one monthly record after another in 2017. After record steel production in July 2017, the country surpassed that record in August 2017. China produced 74.6 million tons of steel, an increase of 8.8% year-over-year (or YoY). This was also the 18th straight monthly YoY rise in Chinese steel production. For the first eight months of the year, the country’s steel production rose 5.4% as compared to the same period last year.

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Mills taking advantage of higher prices

As we discussed in the previous part of this series, steel mills in China are taking advantage of the higher steel margins and producing at maximum capacity. Some reports even suggest that the mills are postponing their scheduled maintenance to take advantage of the current higher run of steel prices.

China’s crackdown and the steel outlook

Producers are also cautious about authorities’ crackdown on steel production as winter months approach, which has brought forward some of the demand, leading to higher production currently.

As the steel capacity cuts start taking place, the steel output should drop in the coming months. Chinese authorities have cracked down on the illegal steel capacity in the country, which has led to a number of shutdowns. This action gave a new lease on life to China’s existing steel mills, which are working at higher capacity to fulfill the steel requirements as demand remains robust.

While this is a positive for miners, the demand for iron ore could wane as steel capacity cuts take effect, which would have negative implications for miners (XME) such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Fortescue Metals Group (FSUGY).

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