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How Far Can Higher Raw Material Prices Carry Steel Prices?

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Dec. 20 2016, Updated 10:36 a.m. ET

Steel prices

Coal has been falling due to the global shift toward renewable and clean energy. However, as we noted in the previous article, coal prices have risen steeply so far in 2016. The global steel cost curve has shifted upward on higher coal (TCK) and iron ore prices (CLF).

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China’s capacity cuts

In a bid to control pollution and curtail its excess industrial capacity, China reduced the hours for workers in its coal sector. However, the country subsequently relaxed the mining day norm to control skyrocketing prices. Higher coal output in China could help bring down the country’s reliance on imports, which would be negative for seaborne prices.

China has banned coal imports from North Korea to comply with the United Nation’s sanctions against the country. However, the ban is temporary and should last only until the end of 2016. Having said that, if the ban is extended into 2017, it could have an impact on prices.

Outlook

The outlook for coal remains uncertain given the many variables involved. If Chinese coal mills ramp up their productions, the rally in coal prices could fizzle away. Higher Chinese demand has been a key driver of seaborne prices this year.

Having said that, coal prices seem to have settled at higher price levels for now. Higher raw material prices could continue to support steel prices in the near term. 

Meanwhile, steelmakers such as U.S. Steel Corporation (X), AK Steel (AKS), and ArcelorMittal (MT) buy coal under contract pricing. In the next article, we’ll see how contract pricing for these companies could play out in 2017.

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