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China’s Steel Prices Are Weak: Negative for Iron Ore Miners

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Chinese steel prices are weak

Chinese steel prices have been on a downtrend since 2013. Steel prices slid to a 12-year low of 2,416 yuan per metric ton on June 3. Steel prices show the strength of underlying demand in the economy. As we’ve seen in the previous updates on Chinese demand indicators, the indicators for the real estate sector remain weak, including building sales and home prices. Fixed asset investment also fell the most in 15 years.

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Easing still to show an impact

Despite the Chinese (FXI) government’s efforts at monetary easing in the economy, including three rate cuts in six months, the demand fundamentals haven’t picked up as expected. However, the rate of decline has slowed in last few months. We’ll need to see data for a few more months in order to be confident about any sustained demand improvement in the end market.

Meanwhile, weak demand is putting downward pressure on steel prices. This can be seen in the sustained downtrend in domestic steel prices in the above chart. The decline in steel prices led Chinese steel mills to drive its increased steel output abroad.

While running down iron ore inventories at ports is sustaining iron ore demand, lower steel prices are making a dent in iron ore price fundamentals.

Steel prices impact iron ore demand

Since 98% of iron ore finds its way into steel production, the most important consideration for iron ore demand is the fundamentals in the steel prices. Also, since China consumes close to two-thirds of global seaborne traded iron ore, it’s important to look at the steel prices prevailing in the Chinese market. As we discussed earlier in this series, steel prices in China are at a 12-year low. This directly impacts the demand for iron ore.

Weak fundamentals in steel prices translate into weak fundamentals for iron ore prices. This is negative for all of the players engaged in seaborne iron ore trade including BHP Billiton (BLT) (BHP), Rio Tinto (RIO), Vale SA (VALE), and the Australian division of the Cliffs Natural Resources (CLF). Cliffs forms 3.6% of the SPDR S&P Metals and Mining ETF (XME).

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