Could the Chinese Steel Industry Feel the Heat as Iron Ore Soars?

Iron ore prices and mill margins

So far in this series, we’ve discussed how Vale’s (VALE) dam disaster has breathed new life into iron ore and why this could continue, at least in the short term. Iron ore (XME) is a key steelmaking ingredient, and China consumes more than two-thirds of seaborne-traded iron ore.

Therefore, rising iron ore prices could negatively affect Chinese steel mill margins, especially at a time when demand isn’t very robust. We’ll discuss these implications in this article.

Could the Chinese Steel Industry Feel the Heat as Iron Ore Soars?

Narrowing margins for steel mills

According to Argus, hot rolled coil’s gross profit margin in January was ~100–200 Chinese yuan per ton (~$15–$30 per ton). Iron ore prices have surged in the last two weeks, and Chinese steel mills could start feeling the pressure as they return on February 11 following the Chinese New Year holiday. Argus reported that the blast furnace spread for HRC narrowed by $13.18 per ton in the week that ended on February 1.

Muted demand to further weigh on margins

As we highlighted in Could China’s Slowdown Weigh on Iron Ore Prices This Year? steel demand in China is expected to remain muted in 2019 on the back of cooling property and auto markets. The trade conflict between the United States (SPY) (VTI) and China (FXI) is further ruining the demand sentiment. In a scenario of weak demand, it will be difficult for mills to pass on the full extent of increased prices to the end consumer. This difficulty could lead to a further squeeze on Chinese steel mills’ margins.