Yahoo Finance How Far Can China’s Steel Prices Lead Iron Ore’s Price Recovery?
Why Analysts Aren't Sold on Iron Ore's Recent Price Rally
China’s steel prices
One of the most dominant factors driving iron ore’s price rally is rising steel production and the resultant increase in steel prices in China.
While this has helped iron ore prices in 1Q16, the question remains whether steel prices can remain buoyant for the remainder of 2016 in order to support the current level of iron ore prices. The answer lies in the analysis of steel’s underlying demand trends in China and elsewhere.
Chinese steel prices have rebounded by ~45% since the start of the year. The rise in prices is most likely due to a seasonal pickup in demand after the Chinese New Year.
Steel production
Chinese steel production rose by 2.9% year-over-year (or YoY) in March 2016 to 70.6 million tons. Higher steel prices have encouraged producers to produce more.
While output in March is usually strong due to seasonality, production was higher than expected this year. However, not many in the industry believe that this rally is sustainable. As Chinese producers ramp up without any significant pickup in underlying demand, the pressure is expected to return to steel prices.
Steel exports
China’s steel exports also surged by 30% YoY and 23% month-over-month in March. Excess steel production by China is exported rather than absorbed into the domestic market. While the United States (VTI) (QQQ) has already slapped high anti-dumping duties on steel products from the rest of the world including China, the European Union is thinking of imposing fresh tariffs on Chinese steel.
Eventually, these tariffs and trade tension should result in a cut in exports, which will not be a positive development for the steel industry. Moreover, the Chinese government seems committed to addressing the overcapacity in the domestic steel sector. This will deter any new investment in the sector, leading to a fall in steel output.
China’s cutting back domestic steel production would result in falling iron ore imports from seaborne suppliers such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).
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