Last week, my colleague Stuart wrote a piece on the relationship between iron ore prices and Chinese steel production. In his piece he said, “The FT suggests the iron ore market is supported by the marginal cost of production in China (said to be around $130 per metric ton) but that doesn’t explain the strength of prices or the stockpiling. For that we have to look at steel production, particularly in China, which has been running at record levels, rising 2.5 percent in May to 61.2 million tons.” Stuart probably didn’t catch a research brief published by intelligence experts Stratfor dated June 20 suggesting, “Since 2011, Beijing’s enforced slowdown in real estate and infrastructure investment — combined with dwindling external demand — has aggravated the severe imbalance between steel supply and slowing domestic demand, “ and more to the point, the imbalance has come by way of local governments’ need and desire to grow steel production to provide employment.
And steel prices will….
As Stuart concludes, “that Chinese steel production, and by extension iron ore consumption, must slow in the second half with a corresponding fall in prices; the longer the current situation prevails, the greater the likely reaction will be and steeper the price falls,” but in the meantime, domestic steel buyers shouldn’t look at the recent scrap price fall (now prices have moved slightly up) as a sign that prices will necessarily drop within the US market.
According to Peter Wright of Gerdau Market Update in an interview with MetalMiner, “the recent scrap price drop is really an ‘in-line’ kind of drop because scrap prices had been building up for quite awhile and the market adjusted,” he said. But the driver of scrap pricing could change in the next four to six weeks according to Wright because, “domestic demand will be down in June and July which could cause another drop. There has been some talk already of a July scrap price drop.”
And though many of the underlying drivers at least of the steel long products market remain quite positive (Wright points to a surprising uptick in durable goods orders from April to May up 1.1%, 13 quarters of growing corporate profits and 4 out of 5 steel long products indicators moving from red to green last week) several gray clouds still appear. These include a stronger dollar that would make US exports less attractive as a result of the Euro crisis, which Wright suggested, “could get very ugly,” particularly the combination of a strong dollar and feeble European economic growth.
US steel prices peaked for HRC and CRC the week of February 6, 2012 after climbing from a low point in the week of November 18, 2011. Prices have only dropped below the November 18 peak last week. We suspect steel prices will begin to stabilize.
The MetalMiner Monthly MMI® which includes several steel indexes, including the Raw Steels MMI®, Automotive MMI®, Construction MMI® among others will first appear on MetalMiner IndX, Monday July 2. Additional releases will appear on July 3, July 5 and July 6.