Chinese steel prices, and the raw materials required to produce it such as iron ore and coking coal, have been on a tear in 2016.
While a number of factors help to explain the sudden reversal of fortune — increased infrastructure and residential property investment in China and supply disruptions just to name two — another major factor has been the decision from Chinese policymakers earlier this year to shutter inefficient and uneconomic steel and coal production within the country.
Policymakers vowed to cut steel capacity by 45 million tonnes, and coal production capacity by 250 million tonnes, in 2016 alone.
As shown in this chart from ANZ, both targets have largely been met, helping to partially explain the recent boost in bulk commodity and steel prices.
“Steel and coal prices have surged sharply as the markets appear to respond well to the pace of capacity reduction in these two industries, after they achieved about 40% of 2016’s target in August and September, respectively,” says ANZ.
“Although we doubt the quick closure of production capacity in the past two months is temporary, stricter government enforcement has arrested the downward pressure on industrial and commodity prices.”