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Will Pollution Curbs Underpin China’s Steel Prices Going Forward?

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China’s steel prices

As we learned in the previous article, bumper margins have prompted Chinese steel mills to continue increasing their output. In 2017, Chinese steel prices rose ~30%, and they’ve remained buoyant this year.

Prices have mainly been rising on firm demand and concerns that the metal might be in short supply going forward owing to authorities’ crackdown on pollution. In this article, we’ll discuss the performance of steel prices in recent months and their outlook going forward.

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Pollution curbs to support prices

China’s recent GDP for the second quarter fell compared to the previous quarter. Investors are wary that the US-China trade spat could lead to more weakness for the latter, and steel price futures have fallen slightly as a result. While they’ve pulled back slightly, they remain well above their historical averages.

As reported by Reuters, according to Jefferies, “With aggressive environmental controls likely to drive steel output restrictions, Chinese prices may soon be boosted by a further production drop.”

There are unverified reports making the rounds that more production curbs are in store for the steel industry in China to fight pollution. This has been conducive to strength in domestic steel prices.

Summer months are usually slow for Chinese construction, which could pressure prices but could also be offset by slower expected production growth as maintenance works come up.

Impact on mining companies

While steel mills’ overall profitability has remained healthy, and steel inventories have remained 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), and Vale SA (VALE), which came under increased pressure when iron ore prices fell off a cliff from 2014 onward.

Cleveland-Cliffs (CLF), on the other hand, has other drivers—namely the steel dynamics of the domestic US market.

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