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 year-to-date, 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.
According to data compiled by Antaike, average hot rolled coil (or HRC) prices in China are currently close to 2,700 yuan per metric ton. This is a fall of almost 13% compared to the price peak in April. Chinese steel prices have fallen from their April peak, as you can see in the above graph. However, prices bottomed out in June. Then we saw a modest recovery in July and August with average HRC prices rising nearly 14% from their June lows.
Now, in September, we’ve started to see some moderation in Chinese steel prices, which have fallen ~4.5%.
What’s driving steel prices?
According to reports, steel mills have restocked their inventories, which was the major driver of the rise in prices. China’s rebar inventories rose almost 0.5 million metric tons in August. HRC inventories also rose during that month.
While inventory restocking provides momentary relief to steel prices, metal prices (DBC) depend on the underlying real demand and supply. As we’ll see in the rest of this series, real estate indicators have started suggesting a weaker demand. This could mean that the country’s steel demand could be subdued. On the supply side, Chinese steel production rose 2.5% year-over-year in the month.
The demand-supply mismatch could hamper a sustained recovery in Chinese steel prices.
Impact on miners
Chinese steel prices and seaborne iron ore prices generally move in tandem. Iron ore prices have been strong this year despite a 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 SA (VALE), and Cliffs Natural Resources (CLF).