China’s steel prices
Among the most dominant factors driving the recent iron ore price rally are higher steel production and the rise in steel prices in China (FXI). Although these factors have helped iron ore prices YTD (year-to-date), the question remains as to whether steel prices can remain buoyant for the remainder of 2016. The answer lies in the underlying demand trends for steel in China and elsewhere.
According to data compiled by Antaike, the average HRC (hot-rolled coal) prices in China are currently close to 3,350 Chinese yuan per metric ton. This price represents an impressive YTD gain of 65%. After falling in June and July, prices have again started picking up.
What’s driving steel prices?
According to reports, steel mills have restocked their inventories, a major driver of the rise in prices. The shortage of another steelmaking raw material, coking coal, has also led to higher prices.
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, which could mean that the country’s steel demand could be subdued. On the supply side, Chinese steel production rose 3.6% year-over-year for the month. A demand-supply mismatch could hamper a sustained recovery in Chinese steel prices.
Impact on mining companies
Chinese steel prices and seaborne iron ore prices move in tandem. Iron ore prices have been strong YTD, despite the supply overhang. Many analysts believe that we could see some moderation in iron ore prices later this year, but 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). In the next part, we’ll discuss how Chinese commodities futures are impacting spot iron ore prices.