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How Long Can Chinese Steel Margins Support Iron Ore?

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China’s steel inventories are depleting

After hitting a multi-year high earlier this year, Chinese steel inventories are now depleting quickly. Strong domestic demand is helping the drawdown of inventories, which is supporting domestic steel prices. According to an analysis by the Australia and New Zealand Banking Group, steel inventories touched a four-year high of 19 million tons in March but have been off 30% since then.

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Profits surge for China’s steel companies

Higher steel prices are helping the margins of Chinese steel companies surge. Government data showed that Chinese steel companies’ profits surged 260% YoY (year-over-year) in April, boosting Chinese industrial companies’ profits, which rose 22% YoY.

Strong demand is also encouraging Chinese steel mills to go for another round of price hikes. China Steel Corporation has announced that it will raise domestic product prices for delivery next quarter by $14.20 (or 1.9%) per ton. The quarter will be the fourth in a row for price hikes. Chinese steelmakers Wuhan Iron and Steel and Baoshan Iron and Steel have announced price hikes of $23–$35 per ton for their shipments next month.

Impact on mining companies

As long as Chinese steel mills’ overall profitability remains high and inventory restocking continues, iron ore prices should remain supported. The trend could be positive for seaborne suppliers (PICK) Rio Tinto (RIO), BHP (BHP) (BBL), Vale (VALE), and Cleveland-Cliffs (CLF).

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