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Can China’s Iron Ore Appetite Support Higher Prices?

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China’s steel production surge

China (FXI) (MCHI) produced 69.4 million tons of steel products in April 2016. This represents a YoY (year-over-year) increase of 0.5%. This is on top of a 2.9% growth in March.

As steel prices remained strong, steel mills took advantage, churning out higher volumes in March and April. Steel mills are optimistic after the government’s announcement of a pickup in investments in infrastructure and residential property.

Steel mills were running low on inventory prior to the Chinese New Year. This coupled with a brighter outlook and higher steel prices led to the surge in production.

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China’s iron ore appetite

China’s iron ore imports for April were 4.6% higher YoY at 83.9 million tons. Because of higher steel prices, some domestic iron ore mines in China restarted production. The demand for high-grade imported iron ore also remained robust. Going forward, however, increasing iron ore port inventories might weigh on iron ore imports, limiting their further growth

Are steel exports unsustainable?

Domestic steel overcapacity has led Chinese steel mills to export steel to the United States (QQQ), Europe (VGK), and other markets. In April, China exported 9.1 million metric tons of steel. Although steel exports have fallen compared to March, they’ve risen 6.4% YoY.

In the first four months of 2016, China exported 3.7 million tons of steel, a YoY increase of 7.6%. However, that trend doesn’t seem to be sustainable given the increasing anti-dumping measures by these markets against cheap Chinese steel.

Steel prices are falling again since authorities have clamped down on speculative activities. But in the face of increasing inventories and falling prices, steel production growth might not be as robust as it has been in the last two months. This would result in lower iron ore imports that are supplied by seaborne players such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).

In the next part of our series, we’ll see if credit-fueled property growth is sustainable in China.

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