Why are steel prices so high when iron ore prices have collapsed? Because: China

There is an apparent contradiction in the global metal market.

The price of steel has climbed the whole year; according to one index, the forward price for a tonne of hot rolled steel is about $1,923, up from $615 last September. Meanwhile, the price of iron ore, the main ingredient of the steel trade, has fallen by more than 40% since mid-July. Demand for the steel is increasing, but the demand for iron ore is decreasing.

A number of factors are responsible for the high prices of steel futures, including tariffs imposed by the Trump administration on imported steel and pent-up industry demand after the pandemic. But China, that produces 57% of the world’s steel, also plans to reduce its production this year, and Which is simultaneously active in the markets for both steel and iron ore.

China cuts its steel production

In a heralded effort to curb pollution, China is: scaling down its steel sector, which produces between 10% and 20% of the country’s carbon emissions. (Aluminium smelters in the country face similar restrictions.) China has also increased tariffs on steel-related exports; For example, from August 1, the rate on ferrochrome, an ingredient of stainless steel, doubled from 20% to 40%.

“We expect crude steel production in China to decline in the long run,” said Steve Xi, senior consultant at research firm Wood Mackenzie. “As a heavily polluting industry, the steel industry will remain a key sector in China’s environmental protection work in the coming years.”

The production cuts, Xi noted, are resulting in lower iron ore consumption. Some steel mills, he said, have even dumped some of their iron ore stocks, raising alarms in the market. “The panic has spread to traders and has resulted in the malaise we are seeing.”

Mining companies are also adapting to China’s new production targets. “The increasing likelihood of severe cuts to steel production in China in the current six months, as confirmed by China’s largest industry association in early August, is testing the optimistic resolve of futures markets,” said a vice president at BHP, Anglo. -Australian mining giant, wrote in a note from the end of August on the outlook for 2021.

China’s tight global supply of steel suggests that shortages of many products will continue until supply and demand stabilize after the pandemic. For example, car companies are already trying to cope with a shortage in the supply of semiconductor chips; a Ford manager told CNBC that steel too is now part of a “new crisis” of raw materials.

In 2019, the US produced 87.8 million tons of steel, according to the World Steel Association, less than a tenth of China’s 995.4 million tons of production. So while US steelmakers are now making more steel than they have done since the 2008 financial crisis, it will be some time before they can fill the shortfall that China’s austerity measures will create.