How Chinese Steel Slowdown Might Hurt Your Portfolio

NEW YORK (The Street) -- China's steel producers seem to have indigestion. It's a sign that things are not quite right in the world's second-largest economy, where steel is used in industries from construction to automobile manufacturing.

It's as worrying as if your 17-year-old son who usually eats you out of house and home suddenly and inexplicably lost his appetite. For years, China's economy voraciously dined on steel bars for breakfast, lunch and dinner.

To see how that's changing, take a look at the chart showing year-to-year growth for China's steel production, based on data for crude steel output from the World Steel Association. It says the data it collects account for about 98% of global production. China produces about half of that each year.

The recent drops might seem modest, less than 2% year to year for the first four months of this year (the latest available data). But it's actually worse than it seems.

It was 1981 when China's yearly steel production last dropped. That was right at the beginning of President Ronald Reagan's first term, and the year before Sun Microsystems, now part of Oracle (ORCL) was founded.

Or put another way, in nearly three-and-a-half decades, China hasn't slowed its steel production once -- not even in the Great Recession of 2008 and 2009 did production retreat.

Yet last year, it basically stalled; and this year, we've seen a steady decline.

Who really hurts from this?

Clearly, producers of iron ore and coal will suffer. Steel is made from those two materials, and Australia and Brazil both export literally boat loads of the stuff to China. If the trend continues, expect iron ore producer Vale (VALE) and diversified miner BHP Billiton (BHP) to suffer.

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