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China’s Steel Production Supported Iron Ore Prices in H1 2018

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Iron ore demand

It’s important for iron ore investors to track the demand patterns in China since it consumes more than 70% of seaborne-traded iron ore (COMT). In this part of the series, we’ll look at iron ore imports and Chinese steel production and assess its future outlook.

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China’s iron ore imports rebound

After increasing by 0.8% YoY (year-over-year) in April, China’s iron ore imports grew 2.9% YoY to 94.1 million tons in May, which is an increase of 13.5% sequentially. On a year-to-date basis, China’s iron ore imports have grown 0.6% YoY. Chinese authorities had put restrictions on steel production until mid-March. The mills have boosted their production since then, resulting in a rebound in iron ore imports. Moreover, firm steel demand and strong margins have also been encouraging mills to keep producing.

China’s steel production remained strong

China’s steel production in May 2018 came in at 81.13 million tons, which is an increase of ~9% year-over-year (or YoY) and 5.8% sequentially. Production for May was also at a record high. According to Reuters calculations, the daily average output for May climbed to 2.62 million tons, 2.4% higher than in April and a record. Steel mills are working at higher capacity to take advantage of strong steel margins amid robust demand. The utilization rate at mills was at 71% in late May. This level was last achieved before October 2017, when the restrictions on steel production were put in place to fight pollution. However, the next few months are the seasonally weaker period for construction in the country. This fact along with rising trade war fears could keep production muted for the second half of the year.

If demand remains weaker, iron ore prices (PICK) might slide even further, which could be negative for Vale (VALE), BHP (BHP), Rio Tinto (RIO), and Cleveland-Cliffs (CLF).

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