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.

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Source: prnewswire.com

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