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Concerns about Chinese Steel Prices Could Be Overblown



Chinese steel demand

China (FXI) is the world’s largest steel producer and consumer. The country’s steel overcapacity and exports have been blamed for depressing global steel prices. However, Chinese steel exports have come down sharply from their 2015 highs. In August, China exported 5.8 million metric tons of steel products, a yearly fall of 9.8%. In the first eight months of 2018, Chinese steel exports have fallen 13.3% to 47.2 million metric tons.

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Supply-side reforms

Chinese steel prices have also been strong amid the country’s supply-side reforms. We should remember that China has permanently shut some of its steel capacity. Along with these permanent capacity closures, the country also has temporary capacity curtailments in place in a bid to address higher pollution levels.

Now, strong steel prices in China coupled with the gradual decline in the country’s steel exports have helped steel prices in other regions also. China’s supply-side reforms have been the key driver of higher steel prices in the country. Although a demand uptick amid higher construction activity has also supported prices, capacity curtailment has been the key factor supporting Chinese steel prices.

Trade spat

Although there are fears over Chinese steel demand amid the trade spat with the United States, China is expected to continue its supply-side reforms, which should prevent any major slide in Chinese steel prices.

While base metals have come under pressure this year, Chinese steel, as well as seaborne iron ore prices (CLF), have been resilient. Higher Chinese steel prices coupled with stable steelmaking raw material prices bode well for global steel prices as well as US steelmakers like U.S. Steel (X), Nucor (NUE), and AK Steel (AKS).

In the next article, we’ll look at steel companies’ valuations.


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