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Stability in Iron Ore Prices Is Important for Steel Companies

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Iron ore prices

In the last part of this series, we discussed that iron ore prices traded sideways in May. Iron ore prices have recovered somewhat from the sub $50 per ton level that they touched in March. In this part of the series, we’ll analyze why a stable iron ore price scenario is crucial for steel companies.

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Mining operations

Several steel companies have integrated backwards. Now, they also have significant exposure to iron ore mining. An example is ArcelorMittal (MT). It’s among the top five iron ore miners globally. The above chart shows the increase in ArcelorMittal’s iron ore output.

Rio Tinto (RIO) and BHP Billiton (BHP) are the other leading iron ore miners.

Lower iron ore prices negatively impact steel companies’ mining operations. ArcelorMittal’s mining segment has posted an operating loss for two consecutive quarters. A higher iron ore price scenario is positive for ArcelorMittal.

Steel prices

Lower iron ore prices also impact steel prices. Lower iron ore prices reduce the unit production cost for Chinese steel companies. A lot of Chinese (EWT) (EWH) steel companies rely on imported iron ore. They benefit from lower input costs. This is unlike US-based steel companies—most of them have their own mining operations.

Stable iron ore prices also lend support to steel prices. In Part 2 of this series, we saw that steel prices in the US have also stabilized. They even registered a modest gain in May.

Almost two-thirds of the steel in the US is made with steel scrap. This makes steel scrap prices a key variable for steel companies’ profitability. In the next part of this series, we’ll discuss how steel scrap prices shaped up in May.

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