One of the factors underpinning the surge in Chinese steel prices over the past year — and along with it iron ore — now appears to be weakening, and fast.
Net Chinese steel product exports are plummeting.
According to the Commonwealth Bank, they slumped by 35% in February compared to a year earlier, continuing the decline that began in August last year.
It’s been pronounced, as seen in the chart below.
Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, says the sharp contraction reflects trade barriers put in place by countries and regions like the US, India and Europe in an attempt to protect their respective domestic steel industries.
“A total 27 countries took out a total of 119 trade actions against China in 2016. Forty-nine of these cases targeted imports of Chinese steels. It is no wonder that Chinese steel exports have started to decline,” he says.
So does that mean that with demand for Chinese steel weakening, prices will follow suit?
Not necessarily, says Dhar, at least in the near-term.
“End-user demand remains resilient as Chinese stimulus continues to flow through China’s commodity intensive sectors,” he says.
“China’s official manufacturing PMI remains near multiyear highs, while infrastructure investment continues to grow strongly.
“We expect both factors will remain strong drivers of Chinese steel demand, as policy makers look to shore up growth before the elections of China’s top leadership in November.”
Dhar is forecasting a modest lift in Chinese steel consumption of around 3% this year, up slightly on the 2% increase calculated in 2016.
However, longer term, he suggests that demand-supply dynamics will likely lead to price declines, and with them inputs such as iron ore.
“Steel prices should fall from current levels by year end, as the supply additions prove too much for actual demand, helping pressure iron ore prices too,” he says.