Weak Chinese steel prices
Chinese steel prices have been on a downtrend since 2013. Steel prices slid to a 20-year low of 2,038 yuan per metric ton on September 14.
Fixed asset investment also fell the most in 15 years. Weak end demand coupled with overcapacity in the steel industry is driving the prices downward. This is also the reason that many steelmakers in China are diverting their production abroad.
Outlook remains tepid
China’s leading steelmaker, Baoshan Iron and Steel, announced that it will keep the prices of its main steel product unchanged for October delivery. This is despite an expected seasonal upturn. This move suggests a weak outlook for steel prices going forward a few months. According to Reuters, Baosteel cut the prices for its hot-rolled steel products by 100 yuan for October.
Impact of steel prices on iron ore demand
Because 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, because 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, steel prices in China are close to 20-year lows, directly impacting 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 the seaborne iron ore trade, including BHP Billiton (BBL) (BHP), Rio Tinto (RIO), Vale SA (VALE), and the Australian division of Cliffs Natural Resources (CLF). Cliffs forms 3.8% of the SPDR S&P Metals and Mining ETF (XME).