Raw material pricing
Steel production is raw-material-intensive in nature. Iron ore, steel scrap, and coking coal are the key raw materials that go into steel production (X) (MT). Higher raw material pricing was among the key drivers of steel prices in 2H16. Seaborne iron ore prices have almost doubled in the last year. That follows three consecutive years in which prices have fallen. Prices hit $83.60 per ton on December 12, 2016, the highest level since September 2014.
Prices have surged
The price gains are a welcome break for leading iron ore companies such as Cliffs Natural Resources (CLF), Rio Tinto (RIO), and Vale (VALE). Iron ore prices have been sliding after almost hitting the $200 per metric ton level at the beginning of 2011.
Coking coal prices also rose sharply in 2016 on China’s capacity cuts and supply disruptions in Australia. The rally in met coal prices took several market participants by surprise. However, more than any fundamental shift in coking coal’s dynamics, the cuts in Chinese capacity helped prices in 2016.
Another factor that has supported coal and iron ore prices has been higher Chinese steel production. While markets were expecting Chinese steel production to fall last year, the production increased in the first 11 months of the year as compared to the corresponding period in 2015.
Notably, the outlook for raw material prices could boil down to demand from China. Chinese demand was better than expected last year. This trend coupled with lower domestic production boosted Chinese iron ore and coal imports.
But, can Chinese demand continue to support raw material prices in 2017? We’ll explore this in the next article.