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Can Chinese Steel Companies Drive Iron Ore Demand in 2017?

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Chinese steel companies

Some analysts have upgraded their iron ore price forecasts due to the recent strength in prices. However, many are still not confident about the long-term fundamentals of the commodity (DBC). This pessimism is not without reason.

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Iron ore supply

Vale SA (VALE) inaugurated its biggest mining project, S11D, on December 17, 2016. It got the operating license for the project on December 9, 2016. Vale will start commercial operations in January 2017. S11D was an investment of $14.3 billion. It’s comprised of a mine and plant with a processing capacity of 90.0 million metric tons per year.

Roy Hill, an iron ore mining project in Western Australia, started shipping iron ore in December 2015. At full capacity, it will produce 55.0 million metric tons per year. These projects will add to the abundant supply in the iron ore market.

Chinese demand

Most of the iron ore mines that are now coming online were planned to cater to Chinese demand. Chinese steel demand was growing at a decent pace until a few years ago. However, Chinese steel demand has likely plateaued, and some expect the country’s steel demand to fall over the next few years as China makes its transition from an investment-led and manufacturing-led economy to a consumption-driven economy.

This transition hasn’t been good news for steelmakers like U.S. Steel (X), ArcelorMittal (MT), and AK Steel (AKS), as Chinese steel mills have been selling their excess steel in international markets amid the glut at home.

Now, could Chinese steel mills continue to wreak havoc on global steel markets in 2017? It will likely boil down to the country’s demand-supply equation, which we’ll discuss in detail in the next article.

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