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% in 2016, they started falling in the last few days of 2016 due to falling futures.
However, steel prices have stayed buoyant in 2017 YTD (year-to-date). The Chinese futures contracts for steel reinforcing bars, or rebar, have risen 17% in 2017.
Japan’s largest steelmaker, Nippon Steel, also expects steel prices in China to remain strong in 2017. The company has stated: “Steel demand and prices in China have been fairly strong on the government’s stimulus.”
Nippon added the following: “My guess is that coking coal prices will stay at $150–$200 a ton as China is said to be trying to cut market volatility.”
In the same vein, Nippon expects iron ore prices to move toward $90 per ton on expectations that China imports will grow.
What’s really 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.
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.
Notably, China’s cutbacks in domestic steel production could result in falling iron ore imports from seaborne suppliers like Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).