| China’s Weak Steel Production Outlook Will Hurt Iron Ore Miners | |
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Why the Long-Term Outlook on Iron Ore Prices Is Still Negative (Continued from Prior Part) China crude steel
China accounts for about half of global steel production and is the world’s biggest buyer of seaborne iron ore. Iron ore is the main ingredient in steel manufacturing, and China is the largest producer and consumer of the two commodities.
China’s steel output increased month-over-month by 1.7% to 66.9 million tons. However, the production declined by 3.5% on a year-over-year (or YoY) basis. For the first eight months of the year, the production dropped by 2% to 543 million tons over the same period last year.
Part of the YoY decline is due to the shutdown of some mills in and around the Hebei province to ensure quality air for the military parade to commemorate the World War II anniversary.
Outlook remains negative
According to the China Iron and Steel Association (or CISA), China’s crude steel output could decline by as much as 2% in 2015. This estimate is lower than CISA’s March estimate of a decline of 1.1%. Weaker construction and manufacturing demand are weighing on steel prices, which is leading to lower steel production.
A decrease in China’s crude steel production would impact the iron ore miners engaged in seaborne iron ore trade such as BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale SA (VALE), Fortescue Metals Group (FSUGY), and Cliffs Natural Resources (CLF). A production decrease would also affect the iShares MSCI Global Metals & Mining Producers ETF (PICK). All listings of BHP, RIO, VALE, and FSUGY form 34.1% of PICK’s holdings.
To take a broader approach toward investing in the steel sector, consider the SPDR S&P Metals and Mining ETF (XME). Cliffs Natural Resources (CLF) makes up 3.8% of XME’s holdings.
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Vale Inco is a nickel and copper producing company based in Brazil. Vale Inco produces nickel, copper, gold, palladium and platinum in Canada, and holds various exploration projects in Australia, in Brazil, in Canada, in Indonesia, in New Caledonia, in Peru and in Turkey. Its main assets in production are MCCREEDY WEST MINE and VICTORIA - INCO in Canada and its main exploration properties are EAGLE CREEK, MEL PROJECT, B20, SHEBANDOWAN - BAND-ORE and GARSON MINE in Canada and BIG FOUR HERON - GOONGARRIE, GOONGARRIE HILL - GOONGARRIE, GOONGARRIE SOUTH - GOONGARRIE, HIGHWAY - GOONGARRIE, SCOTIA - GOONGARRIE, BORDER DOWNS and TOBY PROPERTY in Australia. |