Raw Steels MMI Steady as Iron Ore Prices Surge, But is the Rally Real?

by Raul de Frutos on MARCH 9, 2016

Our Raw Steels MMI stood pat at 47 for a third straight month. However, things look better for the index after U.S. steel mills began raising prices previously this year.

Not surprisingly, not only steel but all industrial metals rose in February. This is not unusual, since steel buyers will be more willing to take a price hike while exchange-traded metals such as aluminum or copper are on the rise. Industrial metals rise in tandem when investors/buyers see some bullish developments such as the hope for another Chinese stimulus or a weaker dollar.

Iron Ore Prices Skyrocket

Over the past few weeks, iron ore prices have skyrocketed, going from $38 in December to $64 per metric ton in March. That’s a 68% rise in a little over two months, a price increase that no one would have expected. There are a few factors explaining the price hike.

Raw-Steels_Chart_March-2016_FNL

First, steel prices in China rose ahead of the construction season, leading to a surge in demand for iron ore. Second, the traditional Chinese restocking after the country’s lunar new year holiday also might have helped lift prices. In January, China imported 82.2 million metric tons of iron ore, up 4.6% year-on-year as steel mills replenished inventories. Finally, buyers saw short-term demand pick up after China boosted credit to the construction and infrastructure sectors. In February, China’s central bank guided its currency downward, suggesting there is still room for more monetary measures to boost the economy.

Nucor Stock Price Up

Nucor stock prices hit a six-month high. Source: MetalMiner analysis of @StockCharts.com data.

As steel and iron ore prices rise, investors have moved money into steel companies such as Nucor Corp. The company’s stock price hit a six-month high in March.

U.S. Steel Imports Fall

Another factor helping U.S. mills to achieve higher prices was the decline in steel imports. In January, finished steel imports fell 40% compared to the same period last year, after a 36% decline in December. That made the capacity utilization rate in the U.S. rise back up to 70%.

Meanwhile, China exported 9.7 mmt of steel in January, a decline of 5.3% year-on-year, as markets took increasing anti-dumping measures against cheap Chinese steel. Also, China’s State Council announced an intention to close 100-150 mmt of steel capacity, potentially cutting as many as 400,000 jobs. Whether the shutdowns will follow the announcements is still unclear.

China seems to be finally preparing the country, both politically and socially, for future forced closures but these closures will probably take a lot of time to materialize, which could keep a lid on steel prices.

Is This Rally Sustainable?

That’s the million dollar question. Although most analysts agree that the long-term slowdown in China’s steel demand has not changed, so this rally could prove fleeting. This price rally might only lead to more production which will translate into higher steel inventories if demand doesn’t materialize. Confidence has returned to the market, but the question remains for how long?

We believe that China is the key to the sustainability of this rally, both in terms of supply and demand. Steel prices will likely follow the trend of the base metals complex. For that reason, it’s important for steel buyers not to focus only in the steel market but watch for clues in other metal markets.

Source:metalminer