Why China’s crude steel production hits record levels

Market Realist

Must-know: An analysis of dry bulk shipping indicators (Part 7 of 11)

(Continued from Part 6)

Crude steel production hits record highs

Since iron ore and metallurgical coal is primarily used to manufacture steel, and China is the largest producer and consumer of the two commodities, China’s crude steel production is a key indicator that dry bulk shipping investors should watch.

Since cheaper seaborne iron ore is expected to displace China’s domestic iron ore until 2016, investors might think China’s crude steel production may not have as much influence over dry bulk shipping companies such as Safe Bulkers Inc. (SB), Knightsbridge Tankers Ltd. (VLCCF), Navios Maritime Holdings Inc. (NM), DryShips Inc. (DRYS), and the Guggenheim Shipping ETF (SEA) as before.

Latest statistics

Global crude steel production increased at an annual 2.2% rate in May to 141 million tons as output in China hit new record levels. North American and European mills also cranked up production. Output in Europe, the second-largest steel-producing region after China, grew by 2.7% to 15.04 million tons, while output in North America grew 3.3% to 10.22 million tons. The Middle East recorded the highest increase of 7.3% to 2.4 million tons.

China’s output in May increased 2.6% year-over-year (or YoY) to 70.4 million tons as steel mills in the world’s biggest producer sought to meet the growing demand. The National Bureau of Statistics revealed that output for the first five months of the year increased 2.7% to 342.52 million tons from the same period last year. For the month of June, China’s crude steel output increased by 4.5% YoY to 69.29 million tons driven by improved profitability. Chinese mills turned a profit over the past couple of months with iron ore prices sliding below $100 per ton from the second half of May.

Outlook

Despite concerns over China’s steel demand, the country is still the key driver for the dry bulk shipping industry. It holds up its growth levels. Overall, the trend suggests that the global steel industry is holding up. Positive growth is expected in 2014. However, with China transitioning to a services and consumer-driven economy, for the first time since 2006, China’s steel growth rate would be outpaced by growth in another country.

Steel demand is seasonally weaker in China during the summer months. Construction activity slows starting in July. Chinese steel output growth has been downgraded to 2% in 2015 from 3% in 2014 and 7.5% in 2013.

Continue to Part 8

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