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Chinese Steel Prices at 12-Year Low: A Heavy Weight for Iron Ore

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Chinese steel prices at 12-year lows

On June 16, Chinese steel prices fell to a new 12-year low of 2,337 yuan per metric ton. Prices have been on a downtrend since 2013. Steel prices show the strength of the underlying demand in the economy.

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Fundamentals remain weak

Despite the Chinese (FXI) government’s efforts at monetary easing in the economy, including three rate cuts in the last seven months, demand fundamentals haven’t picked up as expected. However, the rate of decline has slowed down in the 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. In the subsequent parts of this series, we’ll look at property indicators to see if there’s any improvement happening there.

Meanwhile, weak demand is putting downward pressure on steel prices. There’s a sustained downward trend in domestic steel prices, as we can see in the above graph. The decline in steel prices led Chinese steel mills to drive its increased steel output abroad.

Running down iron ore inventories at ports is sustaining iron ore demand, but 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 of steel prices. Since China consumes close to two-thirds of the global seaborne traded iron ore, it’s important to look at prevailing steel prices in the Chinese market. Low steel prices directly impact the demand for iron ore.

Weak fundamentals in steel prices translate to weak fundamentals for iron ore prices. This is negative for all players engaged in seaborne iron ore trade. These players include BHP Billiton (BLT) (BHP), Rio Tinto (RIO), Vale SA (VALE), and the Australian division of Cliffs Natural Resources (CLF). Cliffs forms 4.2% of the SPDR S&P Metals and Mining ETF (XME).

Since China consumes so much iron ore, we need to be aware of its import appetite in order to understand the demand side of the story. In the next part of this series, we’ll see how China’s imports are progressing.

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