Why a slowdown in China’s steel market impacts iron prices

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China is the biggest iron ore importer

Until now, we’ve seen the current slowdown in China’s steel industry and the factors that have contributed to the steel industry’s current state. Now, we’ll look at the impact of the Chinese slowdown on the global economy.

A slowdown in the biggest steel market has impacted iron ore and steel companies globally. We’ll first look at how the slowdown in the Chinese steel industry has impacted the iron ore sector. Iron is a key raw material for making steel.

Please note that China is a major importer of iron ore, accounting for almost two thirds of the global seaborne trade.

 

Iron ore prices touch multiyear lows

Iron ore prices have been on a free fall over the past several quarters. The chart above shows the iron ore prices from Australia, where iron ore is exported to China. As you can see, the prices have been sliding, falling more than 35% this year alone.

The weakness in iron ore prices is mainly due to the slowdown in the Chinese demand. As an investor in steel companies, you might be tempted to believe a fall in raw material prices bodes well for the steel companies. Well, it’s only partially correct, let’s see how.

A fall in iron ore prices doesn’t cheer steel companies

Over the years, steel companies like ArcelorMittal (MT) and United States Steel (X) have acquired their own mines to secure raw materials for their blast furnaces. So they couldn’t reap the benefits of the fall in the iron ore prices.

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Other steel companies like Nucor (NUE) and Steel Dynamics (STLD) mainly use electric arc furnaces to produce steel, where steel scrap is the key raw material. So even these companies couldn’t reap much benefit out of the fall in iron prices. Please note that these companies form the investment universe for SPDR S&P metals and mining ETF (XME).

Another result of the Chinese slowdown has been a fall in steel prices. We’ll discuss this in the next part.

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