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Investor Alert: Is the Tide Turning for Chinese Steel Prices?

Mohit Oberoi, CFA - Author

Jun. 21 2016, Updated 9:04 a.m. ET

Chinese steel prices

One of the factors driving global steel prices this year is the trend in Chinese steel prices. Chinese steel prices rose steeply in March and early April. However, we’ve seen a correction since then.

Hot rolled coil, or HRC, prices in China have fallen more than 20% from their April peak, as you can see in the graph above. During ArcelorMittal’s (MT) 1Q16 earnings conference call, Lakshmi Mittal, the company’s chairman and chief executive officer, expressed apprehension over the steep rise in Chinese steel prices.

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Mittal acknowledged that the outlook for Chinese steel demand has improved, but he sounded apprehensive about the steep rise in Chinese steel prices. Mittal said that the “overshooting of the price should not be taken as sustainable.” He added that there could be some correction in Chinese steel prices.

Iron ore has fallen, too

The correction in Chinese steel prices has been accompanied by a steep drop in seaborne iron ore, as well. The benchmark iron ore contracts for delivery to China are now hovering around $51 per metric ton. Seaborne iron ore has fallen more than 29% from its April high of $72 per metric ton.

Note that steel prices in China correlate with iron ore prices. This is unlike the US market, where steel prices generally follow steel scrap pricing. This is not surprising, as Chinese steel mills rely heavily on seaborne iron ore. The country accounts for two-thirds of seaborne iron ore demand. Mining giants (GNR) including BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE) rely heavily on Chinese iron ore demand.

In the next part of this series, we’ll look at the recent movement of US steel prices.


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