China cuts steel production to tackle pollution

Of this, China aims to cut 50% of the production (40 million tonnes), though we think this is a bit too ambitious target to achieve given the existing demand for steel in the country. In the past, China has tried similar steps without any visible success. We believe a 25% cut is still achievable in which case there could be a reduction of 20 million tonnes of steel production which, as a result, would require 28 million tonnes of iron ore.

If, however, China indeed cuts the production level by 50%; this could affect a 40 million tonnes of reduction in steel production resulting into a contraction of 56 million tonnes of iron ore imports to the country.

In our view, Brazil's contribution in iron-ore exports to China will remain intact considering the long-term contracts between Vale and Chinese companies. However, Australia could lose its share to the extent China reduces its imports. Assuming the proposed volume cut would have moved between Hedland and Qingdao in a 180k dwt Capesize, a 25% steel production cut would mean that 33 Capesize vessels would lose employment.

In case China goes ahead and actually cuts steel production by 50%; Dry bulk market would lose 56 million tonnes of iron ore thereby removing 66 Capesize vessels of their employment for the mentioned five months.