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Do China’s Steel Prices Have More Room to Benefit Iron Ore Prices?

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China’s steel prices

We discussed, in the previous part of this series, how Chinese steel mills have increased their production in 2017 to take advantage of higher steel prices. Chinese steel prices have improved ~30% in 2017. Steel prices have more than doubled since their lows of late 2015. In this part of our series, we’ll discuss how steel prices have performed in recent months. We’ll also see what it could mean for its future outlook.

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More room to run?

As steel demand remained firm and capacity cuts came into place, Chinese steel prices surged even more. According to Reuters, steel prices in China hit a nine-year high in the first week of December 2017 as the government’s efforts to fight pollution in winter months continued. It added that this was true “amid tighter supplies and unexpectedly healthy demand, especially in the east and southern China.”

According to the managing director of Japan’s biggest producer of recycled steel, steep prices in China have more room to run due to China government’s crackdown on steel capacity and synchronized global growth. He mentioned that hot-rolled coil prices in China could even approach $800 per ton in 2018, which is approximately 25% higher than the current prices.

China’s biggest steel mill, Baoshan Iron & Steel Co., mentioned that they expect their net profits to double when it reports its 2017 results.

Impact on mining companies

While there’s a possibility of a correction in the short term, the restocking activity after winter’s cuts are expected to keep supporting steel prices as well as iron ore prices. This trend could be positive for seaborne suppliers (PICK) such as Rio Tinto (RIO), BHP (BHP)(BBL), Vale (VALE), and Cleveland-Cliffs (CLF).

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