by Raul de Frutos on MARCH 3, 2017

Steel prices have been on a tear since November. However, prices came under pressure in early February.

After having lost some ground over the past month, U.S. steel companies now seem to be pushing for another round of price hikes. But, can U.S. steel prices rise from current levels?

Production Rises

In February, new findings by Greenpeace East Asia and Chinese consultancy Custeel stated that despite China’s high-profile efforts to tackle overcapacity, China’s operating steel capacity increased in 2016. The report suggests that 73% of the announced cuts in capacity were already idle — in other words the plants were not operating. Only 23 million metric tons of cut capacity involved shutting down production plants that were operating. For 2016, China saw a net increase of 37 mmt of operating capacity.

According to the data released by the World Steel Association, China’s January steel production rose 7.4% to 67 mmt while global steel production rose 7% from a year ago.

These numbers give us reason to doubt that China can deliver this year in terms of capacity caps. Given the country’s pollution issues, China is now under pressure to demonstrate progress on capacity cuts, but financial and legal incentives to keep marginal firms running will cause regulators to struggle to enforce capacity cuts. Can the steel price rally continue just on promises of supply cuts?

Will Demand Growth Support Prices?

Despite resilient output, investors have focused on China’s increased appetite for steel. Thanks to the country’s stimulus measures, demand for metals rose there. As a result, Chinese steel exports have fallen double digits for five consecutive months.

China exported 7.4 mmt of steel products in January, down 23.8% from the same period last year. In addition, January steel exports were at their lowest level since June 2014.

Iron Ore Prices Surge

Steelmakers are using the argument of rising iron ore, coal and other raw material prices to press steel buyers to pay more for their steel products. Iron ore is currently trading in the ballpark of $90 per dry mt, the highest since mid-August 2014. After an 85% rise in 2016, the price of iron ore has improved by more than 16% so far this year and has more than doubled in value since hitting near-decade lows at the end of 2015.

What This Means For Metal Buyers

It might not be prudent to draw a conclusion based on January’s steel data alone. But given current trends, China may need to intensify its efforts to curtail excess steel capacity. Demand growth alone might not be a strong argument for U.S. mills to continue to hike prices at the pace the did over the past few months.