China’s steel production finally begins to fall

Posted on 20 Jan 2016 by Michael Cruickshank

For the first time in decades, the production of steel in the People’s Republic of China has seen a decline.

New economic figures released by the Chinese Government today show a fall in steel production of 2.3% in 2015, down to 803.8m tons.

This marked the first time that the yearly production of steel within China has declined since 1981.

Similar falls were also reported in both coal production, which declined for the second straight year, and energy consumption, which declined 0.2%.

These figures represent an overall slowdown in the Chinese economy which has been attempting to shift from an export driven to internal consumption-based model.

While China’s slowdown has been apparent for some time, Chinese steel producers had previously declined to change their production amounts.

This failure to adapt to changing market dynamics led many to accuse Chinese steel mills of waging a price war designed to crash the global price of the commodity and price out competitors.

These criticisms were rejected by Chinese President Xi Jinping during a state visit to the UK late last year.

“China has taken a series of steps to reduce capacity, we have reduced more than 700 million tonnes of production capacity and you can just imagine our task of finding jobs for those workers,” Xi said.

While the drops seen so far in steel production do not reflect that large of a decrease, they do show that China appears to be finally attempting to curtail its production.

Among the major reasons for this is recognition by the Chinese government of the massive housing overcapacity in the country. With less new residential construction, demand for construction steel has also declined, resulting in major oversupply issues.

Good news for foreign iron ore producers

China’s announcement of reduced steel production is good news for iron ore producers elsewhere in the world.

The new figures, combined with supply issues in Brazil have sent the price of iron ore up 4.1% today.

Steel prices also appear to be on the increase across several indices, however the full impact of the data remains to be seen.