CGinspiration/E+ via Getty Images

CGinspiration/E+ via Getty Images

Tuesday, China's National Development and Reform Commission "NDRC" released a statement detailing plans to reduce Chinese steel production in 2022. As the world's largest producer and exporter of steel, and with steel prices at ~3x historic averages, the production cut could contribute to inflation pressures outside of China.

According to a statement released Tuesday by China's Iron and Steel Association, the industry should "maintain a balance between supply and demand under the limited market demand." Further adding, "under the dual constraints of resources and the environment, it is unwise to export low-end steel products on a large scale." China exported 67mt of steel in 2021; the Iron and Steel Association indicated Tuesday that output will decrease by 30mt in 2022.

China has evolved from a net importer of steel as recently as 2009, to become the world's largest producer. China accounts for over 50% of global production and exports of steel. Supply side reform is nothing new in China; however, the pivot to reduced production for air pollution prevention and energy consumption reduction could not come at a worse time for the global economy.

China is the world's largest producer of nitrogen and phosphate fertilizers. In late 2021, the NDRC suspended exports of fertilizer, despite record global prices. China has become the world's second largest refiner of oil, and in March 2022, the country halted oil product exports entirely. China accounts for over 50% of global aluminum production, and in early 2022 the NDRC took steps to cap output, despite record aluminum prices.

Each policy measure has come with carve outs, exceptions, and time frames; aluminum exports hit a record in February, after months of suppression, for example. However, taken in aggregate, the timing is puzzling. In 2021, China was happy to import crude oil, refine it, and export diesel at a $5-$10 margin. In 2022, the country is restricting exports when seaborne diesel margins are ~$50 per barrel.

With spiking prices and shortages popping up globally, investors are sure to remain focused on Chinese industrial policy in coming months. Investors in oil refineries like Valero (VLO) and Marathon (MPC) could benefit from continued oil product export constraints. Aluminum producers like Alcoa (AA) are sure to benefit if continued energy conservation policies cap Chinese production. Fertilizer producers like Nutrien (NTR) and Mosaic (MOS) could face a headwind if fertilizer exports tick up following spring planting in China. And following Tuesday's announcement, iron ore producers like Vale (VALE) could see headwinds from reduced Chinese consumption, while steel producers like US Steel (X) and Nucor (NUE) could see tailwinds.