In December 2016, steel prices in China hit 3,557 Chinese yuan per ton, their highest level in 2.5 years. While steel prices in China rose almost 60% in 2016, they started falling in the last few days of 2016 due to falling futures.
There have been reports that production restrictions in northern China may have been lifted. This kind of development could increase supply, putting pressure on prices. Concerns regarding a slowdown in demand growth in the market also pressured prices.
What's driving steel prices?
To make the domestic steel sector more efficient, a significant amount of capacity was cut in 2016. The stimulus provided by the government also helped steel mills to restock their inventories, which acted as a major driver of rising prices. The shortage of another steelmaking raw material, coking coal, also led to higher prices.
While inventory restocking provides temporary relief to steel prices, metals prices (DBC) depend on underlying real demand and supply. On the supply side, Chinese steel production rose 3.6% year-over-year. A demand-supply mismatch could hamper sustained recovery in Chinese steel prices.
Impact on mining companies
Chinese steel prices and seaborne iron ore prices move in tandem. Iron ore prices have been strong in 2016 despite a supply overhang. Many analysts believe that we could see some moderation in iron ore prices in 2017, and any fall in iron ore prices could also put pressure on Chinese steel prices.
China's cutbacks in domestic steel production could result in falling iron ore imports from seaborne suppliers such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).