China’s Weakening Steel Prices Hurt Iron Ore Miners
China’s steel prices
Factors driving the recent iron ore price rally include higher steel production and the rise in steel prices in China (FXI).
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Although these factors helped iron ore prices in 2016, the question remains whether steel prices can remain buoyant going forward. The answer lies in the underlying demand trends for steel in China and other countries.
Prices trending lower
As we discussed in our previous article, Chinese steel production reached record levels in March 2017. While steel mills churned out as much as possible to take advantage of high Chinese steel prices, this same glut is pushing prices lower as demand is not keeping pace. The rally in prices has faded since mid-March. Prices have fallen by more than 15% since their February highs.
In April, Chinese steelmaker Baoshan Iron & Steel announced that it would cut prices for its steel products—the first cut in ten months.
Impact on mining companies
Chinese steel prices and seaborne iron ore prices move in tandem. Many analysts believe we could see further moderation in iron ore prices in 2017. Any further fall in steel prices could put pressure on iron ore prices. China’s cutbacks in domestic steel production could result in lower iron ore imports from seaborne suppliers such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).