China’s steel demand
As the supply tightness in the seaborne iron ore market continues, there’s another factor supporting prices: Chinese steel demand. China’s (FXI) steel production in April came in at a record high of 85.03 million tons, implying growth of 12.7% month-over-month and 11% YoY (year-over-year). This implies an annualized run rate of more than 1 billion tons.
In the first four months of the year, China produced ~312 million tons of steel, implying an increase of 10.1% YoY. This resilient Chinese demand comes as a surprise as the trade war with the United States rages on.
China steel production outlook
Fortescue Metals Group (FSUGY) CEO Elizabeth Gaines believes that based on the company’s discussions with its customers in China, the country’s steel production will grow 3%–4% this year. China produced a record 928 million tons of steel in 2018.
There have also been several rounds of stimulus in China, which is also supporting steel demand. Moreover, a new round of environmental inspections is underway in China’s industrial hubs. Tighter environmental controls push Chinese mills to go for higher-quality imported ore as opposed to domestic ore. Seaborne iron ore exporters, including Vale (VALE), BHP Billiton (BHP), and Rio Tinto (RIO), form more than two-thirds of the total seaborne iron ore supply. Therefore, the supply tightness and Chinese steel demand are benefiting these miners.
Cleveland-Cliffs (CLF), a US-based iron ore pellet supplier, doesn’t directly benefit from higher seaborne iron ore prices, but they have an indirect positive impact on the miner. Moreover, Vale is the largest global iron ore pellet supplier, and the dam burst has affected its pellet supply, which has positively affected Atlantic pellet premiums, benefiting CLF.