Why Chinese steel production dipped in November
Must-watch indicators for iron ore price direction (Part 5 of 15)
Tracking steel production
Because 98% of the iron ore mined goes into producing steel, it’s important to track steel production to decipher trends for iron ore demand. Also, since China consumes two-thirds of seaborne iron ore, tracking China’s steel demand is a must for investors who want to understand the iron ore demand drivers in proper context.
Crude steel output
The National Bureau of Statistics releases China’s crude steel output on a monthly basis. The data show that China’s crude steel production for November was 63.3 million metric tons against October’s 67.5 million metric tons, a decline of 6.2%. Production also declined 0.2% year-over-year.
Although weak demand is partly responsible for this decline, the Asia-Pacific Economic Cooperation (or APEC) summit held in Beijing also contributed. Large numbers of mills in the key steel-producing province of Hebei were forced to close down to improve the air quality in neighboring Beijing.
Steel outlook
Experts estimate China’s 2014 steel production may rise to 820 million tons, up from 779 million tons, short of China’s installed steel capacity of ~1.1 billion tons.
During this one-year period, capacity has been added across the board. BHP Billiton Limited (BHP), Rio Tinto (RIO), Vale SA (VALE), and Fortescue Metals Group (FSUGY) led the pack. The imbalance between supply and demand is causing the price slump.
Without any significant capacity closures, prices are expected to continue the same way going forward. This is already negatively impacting high-cost players such as Cliffs Natural Resources (CLF), and it also negatively impacts the SPDR S&P Metals and Mining ETF (XME).
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