CRU: Sensitivity of Bulk Steelmaking Raw Materials Markets to Chinese Operating Rates

29 November 2017

In this series of Special Features we have explored the structural changes in the Chinese steel sector brought about by the central government's supply-side reform drive, the impact of these changes on steel industry profitability and production, in China and elsewhere, and on exports of steel and the price of these exports. In this, the fifth and final Special Feature in the series, we turn our attention upstream to explore the impact of supply-side reform on bulk raw materials demand and prices. Our analysis shows that, whilst the restructuring of the Chinese steel sector will lift profitability of the steel sector itself, both in China and elsewhere, it will have little impact on average prices of raw materials. However, overall, mills are likely to favour higher-grade ore and coal to support higher operating rates, but this relationship is weak and other factors can have a more significant influence on grade premia.

Steel sector profitability and raw material prices

When bulk raw material prices move significantly, up or down, we are often asked "how will this movement impact steel industry profitability?" Equally, when the steel industry is performing well - that is, when operating rates and steel prices are high and profitability good - there tends to be an expectation that this should give greater scope to steelmakers to pay more, often willingly, for raw materials. However, our position is that, beyond short-term, sentiment driven impacts, bulk raw material prices and steel industry profitability are not connected, at least not directly. Even for scrap, which was discussed more fully in the previous Special Features in this series, where there is a much closer relationship between scrap price and steel price, there is not necessarily a direct correlation between profitability of the steel sector and input costs. This note sets out our reasoning for this view.

About CRU

CRU offers unrivalled business intelligence on the global metals, mining and fertilizer industries through market analysis, price assessments, consultancy and events.

Since our foundation by Robert Perlman in 1969, we have consistently invested in primary research and robust methodologies, and developed expert teams in key locations worldwide, including in hard-to-reach markets such as China.

CRU employs over 260 experts and has more than 10 offices around the world, in Europe, the Americas, China, Asia and Australia - our office in Beijing opened in 2004.

When facing critical business decisions, you can rely on our first-hand knowledge to give you a complete view of a commodity market. And you can engage with our experts directly, for the full picture and a personalised response.

CRU - big enough to deliver a high quality service, small enough to care about all of our customers.