Lower Input Costs Could Keep Chinese Steel Prices Low
Chinese steel prices
Previously, we noted that we might see a drop in China’s steel exports as more countries impose anti-dumping duties against Chinese steel products. However, the real problem is the weak domestic steel demand in China, led largely by a slowdown in its property market.
Chinese steel prices are currently hovering near multiyear lows. In this part of the series, we’ll analyze why Chinese steel prices could remain low for a while.
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Lower input costs
Unit production costs for Chinese steel producers has come down sharply over the last year. China is the biggest buyer of seaborne iron ore and coal, the two major steel-producing raw materials. China lacks access to quality iron ore reserves and has to rely on miners like Rio Tinto (RIO), BHP Billiton (BHP), and Vale (VALE) to fulfill its raw material requirements.
As China imports most of its iron ore and coal requirements, it has benefited from the steep drop in iron ore prices. Iron ore prices have recently traded weakly as Australia’s (EWA) Department of Industry & Science lowered its iron ore price forecast. The previous chart shows the prices of benchmark iron ore fines for export to China.
Chinese steel prices could remain low
The cocktail of lower input costs and weak domestic demand could keep Chinese steel prices low in the coming months as well. This might act as an incentive for Chinese steel mills to export their products. Any increase in China’s steel exports could put further pressure on global steel prices.
In the next part, we’ll discuss the recent meltdown in metal shares.