Does colder weather hitting steel production mean trouble ahead?

Market Realist

Why dry bulk shipping sees continued favorable trends (Part 11 of 14)

(Continued from Part 10)

Crude steel production

There are many indicators investors can use to get a perspective of iron ore and coal shipments. One of them is crude steel production, often perceived as a bellweather for industrial activity. Year-over-year growth in crude steel production is a key factor that drives demand for iron ore and China’s iron ore imports.

China Crude Steel Production 2013-12-11

Higher iron ore imports are positive for dry bulk shipping rates, while lower iron ore imports are viewed as negative. Because production can be seasonal, market participants often present and analyze year-over-year growth.

Seasonal slowdown

Steel production in China fell in November. According to the National Bureau of Statistics of China, crude steel output fell from 65.1 million metric tonnes to just 60.8 million metric tonnes. Year-over-year growth also fell, dropping from 10.13% to 5.93%.

A seasonal slowdown in production as colder weather arrives in China is typical during this time of the year. As the chart above shows, steel output tends to fall below the long-term trend and bottom around November or December.

Potential challenges

An article on the Wall Street Journal cited other challenges, such as the Chinese’s governments announcement to downsize the steel sector, “including an extension of a moratorium on building new capacity.” As environmental policy tightens in some areas, and more pollution-related news is popping up in media, some steel mills are halting production. This move, of course, is negative. But this will likely have an impact sometime down the road.

Platts, a commodity price and news provider, said it’s unlikely that efforts to curb overcapacity in the steel industry “would show any progress in 2014.” China has historically relied on infrastructure spending to boost economic growth, and there are vested-interest parties like the local government and banks that will “slow down” this change. While consumer sectors are likely to be winners over the next several years, inland Western development and urbanization will continue to support spending on infrastructure and construction—a major demand source for steel.

Supportive steel output

It’s unwise to say the historic growth we’ve experienced in steel production will carry into the end of this decade. But China is going through reforms step by step rather than making significant changes, highlighting the difficulties it has with a large population’s vested interest in the previous economic model. As long as growth momentum doesn’t fall below 5%—near the lows of mid-2012—steel output data is one key indicator that should support iron ore demand and dry bulk stocks and ETFs like DRYS, DSX, SB, NMM, NM, and SEA.

Continue to Part 12

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