China’s steel prices
As we discussed in the previous article, due to old capacity shutdowns, the remaining mills are working on improved utilization to fill the gap. Improved utilization is thus leading to higher margins for the mills. Stronger steel demand is the key driving factor behind the rising output.
The benchmark rebar contract on the Shanghai Futures Exchange reached a seven-year high of 4,418 yuan per ton on August 22 only to retract 6% a week later, according to Reuters. While steel margins are still strong due to robust demand, concerns over the Chinese growth outlook were weighing on steel prices.
Reuters also reports that steel futures have gained ~29% from the end of last year to this year’s recent peak. These bumper margins have prompted Chinese steel mills to continue increasing their output.
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.
While the year-to-date run of Chinese steel prices has been great, concerns are growing that as the US-China trade war escalates, China’s growth might weaken for the rest of the year, which could impact steel prices. While there might be a correction in prices from the recent peak, strong demand should underpin prices. Moreover, China’s government has also announced stimulus and easing measures to mitigate the impact of a slowdown from trade disputes.
Impact on mining companies
As steel mills’ overall profitability remains healthy and steel inventories have remained low, seaborne suppliers (PICK) Rio Tinto (RIO), BHP (BHP) (BBL), and Vale (VALE) are relatively well positioned. Plus, these companies produce relatively high grade ore. Cleveland-Cliffs (CLF), on the other hand, has sold off its Australian business, the only unit through which it had seaborne exposure. Thus, it’s more of a domestic US player now, though seaborne iron ore prices do impact its overall fundamentals and contract pricing.