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, the highest level in two and a half years. While steel prices in China rose almost 60.0% in 2016, they started falling in the last few days of 2016 due to falling futures.
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 restock their inventories, which acted as a major driver of rising prices. The shortage of coking coal, another steelmaking raw material, also led to higher prices.
Inventory restocking provides temporary relief to steel prices, but metals prices (DBC) depend on underlying real demand and supply. Before the Chinese New Year, a fall in activity 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 a 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).