Why China’s crude steel production is rising

Market Realist

Overview: Why dry bulk indicators are gaining firm ground (Part 5 of 7)

(Continued from Part 4)

China’s crude steel production is rising

Since iron ore and metallurgical coal are 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.

Cheaper seaborne iron ore is expected to displace China’s domestic iron ore up until 2016. As a result, investors might think China’s crude steel production may not have as much influence as before 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).

July crude steel statistics

Global crude steel production for 65 countries reporting to the World Steel Association registered an annual 3.1% rate in June to 137 million tons as China and Europe recorded output increases. Output in the European Union, (or EU) the second-largest steel-producing region after China, grew by 3.8%, while output in North America grew 1.7%. June steel output grew at 6.1% in the construction-heavy Middle East—the strongest global growth rate.

China’s June output increased 4.5% year-over-year (or YoY) to 69.3 million tons. It was driven by improved profitability. The National Bureau of Statistics revealed that output for the first six months of the year, China’s output increased 3% to 411.9 million tons from the same period last year. Chinese mills managed to turn a profit over the past couple of months with iron ore prices sliding below $100 per ton from the second half of May. Daily average production in June reached a record-high 2.31 million tons, compared to 2.27 million tons in May.

Outlook

Global supply and demand for steel are likely to follow economic growth recovery around the world. In China, national mandates to rationalize capacity will have an effect on supply. As the Chinese economy moves to a more consumer-driven model, steel consumption is expected to moderate in the country.

Despite concerns over China’s steel demand, the country still remains the key driver for the dry bulk shipping industry. It’s holding up its growth levels. Overall, the trend suggests that the global steel industry is holding up. 2014 is expected to record positive growth. With increased optimism in China and a recent stimulus to counter property market slowdown, the growth trend for the shipping industry indicates positivity.

Let’s take a look at China’s iron ore port inventory levels.

Continue to Part 6

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