Raw Steels MMI Surges 14%, Steel Rally is Starting to Look Sustainable

May 5, 2016

Steel prices continued to soar in April, holding their place as the best price performer among industrial metals this year.

In Q1, it appeared that anti-dumping actions were the only force causing steel prices to rally. That questioned the longevity of the price rally since steel buyers could always turn to international suppliers for cheaper prices if domestic prices overextended. However, the picture has recently changed.

China Steel Prices Surge on Government Stimulus

Prices are not just rising domestically but globally, particularly in China. Chinese steel prices have jumped over 40% in a matter of weeks. Take HRC prices, in the U.S. they have increased in the ballpark of 30% so far in 2016 while Chinese HRC prices have now risen over 50% this year.

China’s not-so-mini fiscal stimulus, initiated late last year, has really picked up momentum in recent weeks. Across a number of metrics, China’s economy has surged this year driving a risk on sentiment among investors, the strength of which has caught many by surprise.

In Q1, China’s industrial production rose 5.8% year-on-year, the highest growth figure since June 2015. State banks and local governments are also pumping money into fixed asset investment (FAI). In Q1, FAI growth accelerated to 10.7%. The data indicates that China’s real estate investments grew due to rising home sales.

Raw Material Prices Rise

Of course, the rally in steel prices was also supported by a rise in raw material prices. Oil prices managed to climb above $45 a barrel, shaking off bearish news in April, a sign that underlying sentiment might be shifting in favor of higher prices. Iron ore prices climbed as high as $70.46 in April, the highest level in 15 months. Scrap prices also continued to rise in April.

Production Ramps Up

Global raw steel production during March reached its highest total in nine months with global raw-steel capacity utilization at 70.2%, up 3.9% from February although still 1.3% lower than the same period last year.

Previously, China committed to reduce its excess steel capacity. However, it doesn’t look like this will be in the form of supply cuts. For the month of March, China’s raw steel production increased 20.74% from February to 70.7 million metric tons, an increase of 2.9% over the March 2015 total. That seems to suggest that rising steel prices have only ensured that Chinese steel mills produce more of the metal. The big question is whether the stimulus-driven demand will be enough to absorb current supply. So far, markets seem optimistic about it.

Sustainable Price Rally?

These developments might only serve to prolong the problems of overcapacity in the steel industry but that doesn’t change the fact that we could see strong steel prices for at least much of the second half of the year. Prices could come down sometime in the future but, right now, momentum is clearly pointing upward for steel and for commodities across the board.

Chinese stimulus programs suggest that lax lending and stimulus have, indeed, spurred a new infrastructure economic boom. China has stated that it doesn’t want to create an additional property bubble but there are reasons to be skeptical. Previously, China has shown that shot-in-the-arm stimulus programs often turn into prolonged addictive habits, perhaps spurring demand growth for longer than what most people anticipate.