China’s demand and supply dynamics
Generally, steelmaking raw materials and steel prices tend to move in tandem. Steel prices react to changes in raw material prices and vice versa. Now, iron ore, steel scrap, and coking coal (BHP) are among the key steelmaking raw materials. China is the key driver of seaborne iron ore prices, as the country accounts for over two-thirds of global seaborne iron ore demand (CLF)(RIO).
Iron ore prices
Iron ore prices have shown strength over the last couple of months. Chinese imports have been strong despite record port inventories. Notably, as China has shut some of the steel mills producing steel through scrap, it could be leading to pent-up iron ore demand from blast furnaces. Plus, due to China’s pollution control measures, Chinese steel mills have been using more high-grade iron ore, which has led to higher spreads between low-grade and high-grade iron ore prices.
Looking forward to 2018, we could see some increase in iron ore supply as Vale’s (VALE) S11D project ramps up production. On the demand side, Chinese demand might not be as robust as we saw last year. However, demand ex-China looks decent as things stand today. Goldman Sachs holds a bearish view on iron ore and sees iron ore plunging to $50 this year.
Iron ore prices could come under pressure as the year progresses on a possible supply surplus. Any decline in iron ore prices could pressure global steel prices (PKX). However, iron ore prices might not fall much as strong ex-China demand could support iron ore prices.
In the next and final part of this series, we’ll see how the outlook for Chinese steel prices and raw material prices could impact US steel prices this year.