Chinese Steel Prices Are Surging—Can They Keep the Momentum?
Chinese steel production has been hitting one record after another. This renewed vigor in the Chinese steel industry is due to higher steel prices.
July 25 2017, Updated 9:06 a.m. ET
China’s steel prices are surging
Chinese steel production has been hitting one record after another. This renewed vigor in the Chinese steel industry is due to higher steel prices.
Steel mills, in turn, are churning more products to benefit from higher margins.
According to Bloomberg, reinforcement bar futures, which are primarily used in the construction sector, have risen 27% on the Shanghai Futures Exchange in 2017.
On July 17, 2017, futures hit their highest level since 2013. Coil futures have also surged 12% since 2016’s end. Higher steel prices are also apparent in the steelmakers’ stock prices. Chinese steel giants Hesteel and Baoshan have risen 33% and 15% year-to-date, respectively.
Many market participants are concerned that 2H17 could be weaker for Chinese real estate due to credit tightening measures and slowing sales, which could dampen steel prices in the domestic market.
Impact on mining companies
If fundamental factors aren’t able to support steel prices going forward due to a weaker real estate sector and credit tightening measures, the current rally could fade away. The demand for seaborne iron ore is a derived from steel demand. Its demand is thus directly related to steel prices.
A halt in the steel price rally in China, therefore, would likely be negative for seaborne suppliers (PICK) such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).