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 helped iron ore prices in 2016, the question remains whether steel prices can remain buoyant going forward. The answer lies in the underlying demand trends for steel in China and elsewhere.
In December 2016, steel prices in China hit 3,557 Chinese yuan per ton, their highest level in two and a half years. While steel prices in China rose almost 60% in 2016, they started falling in the last few days of 2016 due to falling futures.
There have been reports that production restrictions in northern China may have been lifted. This development could increase supply, putting pressure on prices. Concerns regarding a slowdown in demand growth in the market have also pressured prices.
What’s driving steel prices?
To make the domestic steel sector more efficient, a significant amount of capacity was cut in 2016. The stimulus provided by the government also helped steel mills to restock their inventories, which acted as a major driver of rising prices. The shortage of another steelmaking raw material, coking coal, also led to higher prices.
While inventory restocking provides temporary relief to steel prices, metals prices (DBC) depend on underlying real demand and supply. Ahead of the Chinese New Year break, a fall in activity has led to a pullback in steel prices. Earlier, prices had built on their gains due to restocking.
Impact on mining companies
Chinese steel prices and seaborne iron ore prices move in tandem. Many analysts believe that we could see moderation in iron ore prices in 2017. Any fall in steel prices could also put pressure on iron ore 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).