China’s steel prices
Some of the most dominant factors driving the recent iron ore price rally include 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 as well as other countries.
In December 2016, steel prices in China hit 3,557 Chinese yuan per ton, the highest level in two and a half years. Steel prices in China rose almost 60% in 2016. The prices have also stayed buoyant in 2017 YTD (year-to-date). The Chinese futures contracts for steel reinforcing bars, or rebar, have risen 17% in 2017.
The main reason for prices remaining buoyant in 2017 is China’s renewed push to cut excess capacity in the steel industry.
Japan’s largest steelmaker, Nippon Steel, also expects steel prices in China to remain strong in 2017. The company stated, “Steel demand and prices in China have been fairly strong on the government’s stimulus.” A company representative added, “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.”
Impact on mining companies
Chinese steel prices and seaborne iron ore prices move in tandem. Many analysts believe we could see moderation in iron ore prices in 2017. Any fall in steel prices could 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).