- China's consumption for steel over the past decade was driven by an export-based investment model. This model attracted foreign capital investment in manufacturing in order to take advantage of China's low-cost labor advantage.
- Going forward, the government is shifting it's fiscal focus from public investments to tax cuts and consumption subsidies.
- PIMCO estimates that there is 850m metric tons of capacity in China.
- The ripple effects of this supply glut could lead to more softening in iron ore prices, a weaker Australian dollar, and the most obvious, weaker global steel prices.
Perhaps a good pair trade would be to long the low-cost suppliers and short the higher-cost suppliers...
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