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Could China’s Strong Steel Margins Sustain Iron Ore Prices?

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China’s steel prices

As we saw in the previous part of this series, wider margins have prompted Chinese steel mills to continue increasing their output. In 2017, Chinese steel prices rose ~30%, and they have remained buoyant this year. In this part of the series, we’ll discuss steel prices’ performance in recent months and their outlook.

China’s steel companies’ profits surge

China Steel has announced that it will raise domestic product prices for delivery next quarter by ~$14.23 (or 1.9%) per ton, due to rising international prices. The quarter will be the fourth in a row to bring price hikes. Chinese steelmakers Wuhan Iron and Steel and Baoshan Iron & Steel have announced price hikes of $23–$35 per ton for their shipments next month.

Moreover, in April. China’s industrial profits rose at the fastest pace in six months. Government data showed that Chinese steel companies’ profits surged 260% year-over-year in April, boosting Chinese industrial companies’ profits, which rose 22% YoY.

Steel inventories have been dropping at Chinese mills since March, which points to firm demand. According to SteelHome Consultancy, Chinese traders’ steel product rebar inventories fell 38% from the year’s high in mid-March to 60.3 million tons in mid-May.

Impact on mining companies

While steel mills’ overall profitability has remained healthy and steel inventories have stayed low (meaning firm iron ore demand), higher iron ore inventories could still pressure iron ore prices. The trend could be negative for seaborne suppliers (PICK) Rio Tinto (RIO), BHP (BHP) (BBL), Vale (VALE), and Cleveland-Cliffs (CLF).

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