Steel could get a bid on declining Chinese stockpiles

China’s steel mills curbed their output over the summer, driving inventories of finished steel products well below historical averages and giving global steel prices a lift.

In all, steel supplies in China are reportedly back at late 2010 levels — lower than they have been in nearly a year — after the country’s steel mills were idled through much of June and July.

With inventories of most classes of steel products now below 18-month averages, industrial demand for added supply has pushed spot prices up in the last few days.

This morning alone, steel is trading up $8 at $600 a ton — a 7-week high.

Unfortunately, this is not a global phenomenon. One of the reasons Chinese stockpiles were allowed to get so low was the prospect of power restrictions throughout the industry.

North American steel makers like U.S. Steel (X) have been operating under no such constraints, and in fact U.S. steel stockpiles are now at their highest since 2009.

Might be a chance here to play the iron group, which is feeding increasingly low grades of ore to China as mills there try to contain their costs. The basket is BHP Billiton (BHP), Rio Tinto (RIO) and, as always, VALE.

The Market Vectors Steel ETF (SLX) is down about a quarter so far this year, while the S&P Global Materials Sector Index Fund Holdings ETF (MXI) is down about 10%.

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