China’s steel prices
In the earlier parts of this series, we discussed how Chinese steel production has hit records almost every month this year. This momentum in production was due to higher Chinese steel prices.
Steel prices weakening
According to Platts, the Chinese hot-rolled coil (or HRC) export prices fell by $36 per metric ton to $560 per metric ton on September 22, 2017, as compared to September 8, 2017. While the coming steel capacity cuts in winter months have fueled the steel prices in recent months, the same might not be true in the coming months. If activity in the construction and infrastructure sectors falls, the steel prices should come down. In fact, prices have started coming down from the early August peak. The restocking activity in Chinese mills has started weakening.
Also, the limits on speculative trading that authorities have put in place by means of increasing transaction fees from 0.01% to 0.05% of the total value has also hit the speculative trading in the steel market. The upcoming capacity cuts had led to a surge in speculative activities, which forced authorities to take this action.
Impact on mining companies
As the outlook for steel prices remains weak pending the capacity cuts, the iron ore prices are also expected to come under pressure. Thus, a halt in the steel price rally in China would be negative for seaborne suppliers (PICK) such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cleveland-Cliffs (CLF).