I've now written several articles on how I expect a slowdown in very specific industries, namely the residential construction industry in China, as well as auto production (China) and shipbuilding (worldwide), to hit the steel and iron ore sectors severely.
Since I started covering these sectors here on Seeking Alpha, on such articles as "Steel Is In China's Hands," "An Emerging Problem With Steel Prices," "The Iron Ore End Is Nigh" among others, both the steel sector and the iron ore sector have underperformed against the general market, as can be seen in the tables below.
Steel since January 19 (session before first article warning on steel)
AK Steel (AKS)
US Steel (X)
Arcelor Mittal ADR (MT)
Market Vectors Steel Index ETF (SLX)
* Includes $0.05 in dividends
** Includes $0.188 in dividends
Iron ore since January 27 (session before first article warning on iron ore)
BHP Billiton (BHP)
Rio Tinto (RIO)
VALE S.A. (VALE)
So, given this performance, what can we expect now? Basically, we can expect more of the same - more underperformance from these sectors. The news is now providing us hard data that continues to validate the thesis that led to these articles. Demand for steel in China is under pressure, and this will lead both to lower demand for iron ore, lower prices for steel (worldwide) and lower prices for iron ore (worldwide). For instance:
- Just yesterday Cliffs Natural Resources (CLF) warned about the difficult trading conditions with Chinese steel production seemingly slowing down in recent weeks;
- The World Steel Association published January 2012 statistics on crude steel production. China's steel production dropped a full 13% yoy, for a loss of 7.8 million tonnes;
- Residential prices continue falling throughout China, with January presenting a further acceleration in this trend. Bear in mind that the brunt of the impact from reduced construction is still in the future, given that there's a delay between new activity falling, and ongoing construction dropping - new activity still has to drop below finished construction.
The thesis I have been advancing in several previous articles remains valid - January Chinese steel production statistics as well as the ongoing residential price erosion lend this thesis even more weight. Both future prospects and present developments indicate the clear and present danger under which these two sectors (steel and iron ore) are.