Chinese steel output dropped 3.7% in July vs. June, but was still up 2.2% year over year, according to the National Bureau of Statistics.
Low-single-digit year over year growth is a huge change from the gangbusters growth of the past, but while this may not be the best of news for commodity producers who feed steel and steel-related demand, such as Australia's BHP, Rio Tinto, and Brazil's Vale, slower output growth might be just what the Chinese steel industry needs.
That's because the industry is facing serious over-capacity concerns:
the China Iron and Steel Association (CISA) has warned that the entire industry is facing heavy losses in the second half of the year unless it tackles its longstanding overcapacity problems.
While a number of small- and medium-sized mills have slashed output in order to avoid losses, the bigger mills have scheduled overhauls as a way of cutting the glut.
CISA figures released on Wednesday said daily output from China's top 61 mills stood at 1.34 million tons, down 8.2 percent since the beginning of June. Overall daily output fell 7.8 percent over the same period.
The government is already pushing for further industry consolidation and capacity shut-downs (for inefficient plants), but this is probably the industry's way to keep pushing the government to do more.
Yet at the same time, the situation relative to steel-related commodities suppliers remains a bit nuanced. That's because despite the low output growth for steel, Chinese steelmakers have just begun re-stocking their iron ore inventories, reviving Chinese iron ore demand which many had feared was waning as companies de-stocked ore inventories earlier this year. This re-stocking is a major reason why the Baltic Dry Index has rebounded hard as of late, after suffering steep declines earlier. U.S.-listed dry bulk companies such as DryShips (DRYS), Eagle Bulk (EGLE), Diana (DSX), and Genco (GNK), in addition to Asia-listed ones such as Pac Basin (2343 HK), will be happy to see this re-stocking cycle.
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