Steel Prices Resilient, But Winter Could Bring A Correction

28 October 2016

Steel prices in China remain resilient, but there are concerns that a correction in prices is looming. Chinese steel prices have climbed this year amid increased infrastructure development as part of the government’s stimulus programs, but right now it appears most of the steel that China is importing is being stockpiled.

In order for steel prices to remain buoyant we need a real increase in supply/demand, and right now with evidence suggesting that a big portion of China’s steel is being stockpiled, the commodity is vulnerable to a correction.

Steel prices emerged this year after seasons of weakness, pressured by oversupply as China flooded the market with cheap steel products. China’s cheap steel exports have lead to other country’s placing steep tariffs on imported Chinese steel products. In theory, that should have pressured Chinese steel prices but robust domestic demand has counteracted reduced demand for exports and sent prices higher.

China had pledged to trim is steel overcapacity over the next few years, but a rebound in steel prices and lowered emissions from steel plants could remove the country’s incentive to crackdown on its steel miners. China has targeted a cut of 45 million tons from its surplus steel capacity this year. There are mixed reports on how the country is progressing towards this goal, but the rebound in steel prices has removed some of the incentive for Chinese steel miners to reduce overcapacity.

Another factor that is reducing the incentive for China to push its steel miners to curb output is reduced emissions. The country began a crackdown on pollution in 2014, forcing steel companies that were found to be in violation of environmental regulations to clean up their act. Some companies were shuttered, others upgraded their equipment. The result has been reduced emissions from the sector. If the country can reduce its emissions and maintain (or increase) steel production to capitalize on higher prices and domestic demand, it has little incentive to continue to punish its domestic steel producers.


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