Commodities investors have heard the terms “peak oil” and even “peak gold.”

Now, it’s time to become familiar with another term being used more and more by commodities players – peak steel.

The term was sparked by China and its steelmaking industry. You see, after years of heady growth of 15% annually from 2000 to 2013, China’s steel industry is experiencing unprecedented slacking demand. The country produced half of the world’s steel in 2014, about 820 million metric tons (mmt).

The new chairman of the China Iron & Steel Association, Zhang Guangning, made this position clear during a speech in January where he said, “China’s steel sector has already entered a period of peaking and flattening out.”

Chinese steel production hitting a peak will have profound implications, not only on global growth, but also on the large companies mining iron ore and metallurgical coal in particular.

Not to mention, steelmakers elsewhere around the globe…

Chinese Steel Demand Down

Zhang’s words must have come as a shock to some since many forecasts didn’t call for a peak in China’s steel production until the middle of the next decade at the earliest.

The facts, though, back up Zhang’s assertion. Last year, Chinese demand for steel actually fell 3.4% to 740 mmt. That was the first drop in steel demand in 30 years!

On the Shanghai Futures Exchange, steel rebar – a form of steel most associated with construction – is at its lowest level ever since the contract was launched in 2009.

The drop in demand is no doubt fueled by three trends: China’s move toward a consumer-led economy, its move away from infrastructure and property, and its crackdown on pollution.

The biggest user of steel in China is the property sector. Thus, the slowing urbanization of the country should continue to impact steel demand negatively going forward.

That isn’t good news for global producers of metallurgical coal or other steel producers.

Losers and Bigger Losers

You see, China has a steelmaking capacity of about 1.2 billion metric tons (bmt), and Beijing won’t want to let all those workers go idle just because demand in its own country is down.

That means the country will need to export the difference. And it’s already started…

Last year, China has exported 94 mmt of steel – that’s more than the United States even produced! Chinese exports of steel in January were at an annualized rate of 124 mmt.

China is exporting the steel at lower prices, too, thanks to cheaper input prices. This is also intensifying the deflationary pressures monetary policymakers are so worried about.

Yet, these concerns pale in comparison to those of one particular affected industry.

The large iron producers – like Vale S.A. (VALE), Rio Tinto PLC (RIO), and BHP Billiton (BHP) – will suffer greatly from the steel decline.

These mining giants and others have bet $120 billion since 2011 on their belief that steel production in China won’t peak until 2025 or later!

There’s bullish, and then there’s being in a dreamland…

Even though iron ore was the worst-performing commodity in 2014 – down nearly 50% – the big miners are still overwhelmingly bullish.

The big three and the No. 4 miner, Fortescue Metals (FSUGY), are in the process of adding approximately 400 mmt per year of iron ore capacity.

Both BHP and Rio recently stuck to their forecast that Chinese steel output would reach one bmt by 2025 or 2030, at the latest. And all of the big three iron ore miners are continuing to raise output in an effort to squash smaller producers.

A truly ridiculous move when demand from the biggest steel consumer in the world is declining, making iron ore a commodity and industry to avoid for the foreseeable future.

And the chase continues,

Tim Maverick