Why Analysts Disagree about Where the US Steel Industry Is Headed
Iron ore prices
Rising seaborne iron ore has been one of the prime factors supporting higher Chinese steel prices. Seaborne iron ore, which has been in a falling trend since 2011, has also joined the industrial metals (DBB) rally. Seaborne iron ore prices had a big spike earlier this month and reached $64 per metric ton.
Note that integrated steelmakers including ArcelorMittal (MT) and U.S. Steel (X) are at a competitive advantage when iron ore prices rise. Major iron ore names like Rio Tinto (RIO) and BHP Billiton (BHP) also benefit if iron ore prices go up.
Steel prices
The graph above shows the movement in Chinese HRC (hot rolled coil) prices plotted against benchmark iron ore prices. As you can see, the two have generally been moving in tandem with each other. Steel prices in China have also risen this month along with the upward movement in iron ore prices. This is not surprising as Chinese steel mills rely heavily on seaborne iron ore. The country accounts for two-thirds of seaborne iron ore demand. This is unlike the US where scrap prices are the key driver of steel prices.
Iron ore prices fell
After the brief spike earlier this month, benchmark iron ore contracts for export to China have now fallen to $55 per metric ton. Faltering iron ore prices show the vulnerability of higher Chinese steel prices. Having said that, a modest uptick in Chinese steel prices was expected, as we had noted in our previous series.
Reports suggest that most Chinese steel mills were losing money by selling steel at depressed prices. This warranted an increase in steel prices, as no industry can survive prolonged losses. However, does this mean that we could see prices rising even higher? Probably not, as we’ll explore in the next part of the series.
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