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Can China Sustain Its Steel Price Increases?

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China’s steel prices

One of the most dominant factors driving iron ore’s price rally is rising steel production and the resulting increase in steel prices in China (FXI).

Although this has helped iron ore prices in 1H16, the question remains whether steel prices can remain buoyant for the remainder of 2016 in order to support the current level of iron ore prices. The answer lies in the analysis of steel’s underlying demand trends in China and elsewhere.

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According to the data compiled by Antaike, average hot rolled coil (or HRC) prices in China currently stand at 2,886 Chinese yuan per metric ton. This is a fall of almost 12% compared to the price peak in April. However, Chinese steel prices have been stable lately, slowly inching upward in July and August.

What is driving Chinese steel prices?

According to reports, steel mills in China lost money in 2015 by selling steel at depressed prices. This warranted an increase in Chinese steel prices. So, it’s not surprising that we have seen steel prices rising in China in 2016.

Also, the sudden increase in Chinese real estate activity earlier in 2016 supported the upward momentum in Chinese steel prices. Lower inventory levels in China are also supporting steel prices in the country.

Outlook

However, Chinese construction activity is losing steam. If we consider Chinese steel prices, the market seems to be factoring in another round of fiscal stimulus from China. Chinese steel prices could come under pressure if we don’t see new stimulus measures. However, the Chinese government usually steps in whenever the country’s economic activity shows signs of stagnation.

Chinese steel prices and seaborne iron ore prices generally move in tandem. Iron ore prices have been strong this year despite supply overhang. Many analysts believe that we could see some moderation in iron ore prices later this year. Any fall in iron ore prices could also put pressure on Chinese steel prices.

China’s cutbacks in domestic steel production could result in falling iron ore imports from seaborne suppliers such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).

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