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Why the US Steel Industry’s 4Q17 Outlook Is Hazy

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Part 5
Why the US Steel Industry’s 4Q17 Outlook Is Hazy PART 5 OF 9

Falling Iron Ore Prices Could Drive US Steel Prices Lower

Falling iron ore prices

Raw material prices tend to impact steel prices. Last year, we saw a sharp increase in seaborne coking coal prices. Iron ore prices also rallied due to support from rising Chinese demand. As raw material prices rose, global steel prices received a natural boost. China’s steel capacity cuts also helped the rally in global steel prices.

Falling Iron Ore Prices Could Drive US Steel Prices Lower

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Supply surplus

Looking at the current scenario, iron ore has been weak for the last two quarters. The benchmark 62% iron ore for China delivery lost more than 20% last month. Notably, while some analysts were bullish on steel prices earlier this year, most of them were quite bearish on iron ore due to the oversupplied market. We also have fresh supply coming in from Vale’s (VALE) S11D project that could put more pressure on iron ore prices (CLF).

The recent downturn in steel scrap prices could also be partially due to falling iron ore prices. The arbitrage between steel scrap and iron ore markets pushes some steel mills to alternate raw materials like billets and DRI (direct reduced iron).

Why’s iron ore falling

Some market observers have cited China’s winter month steel production cuts as a bearish driver for iron ore prices. There could be some merit to this argument. China drives the global seaborne market and accounts for two-thirds of seaborne iron ore imports. If China cuts its steel production, its iron ore demand would also fall.

Interestingly, while China’s capacity cuts are seen as a bearish driver for iron ore prices, China’s capacity cut talk last year actually led to higher iron and steel prices (X) (AKS). In the next part, we’ll see whether China’s capacity cuts are really a bearish driver for global steel markets (MT).

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