Steel market at risk of running afoul of price fundamentals

THE steel market continues to surprise observers. Despite a global overcapacity in steel, the prices of iron ore and coking coal, the key ingredients in producing steel, staged one of strongest rallies in the commodities world in 2016. Much of the rationale behind the price surge has been attributed to the world's largest steel producer and consumer in the world, China. The Asian giant's measures at cutting steel overcapacity last year contributed to a sharp rise in prices as demand for coking coal and iron ore imports jumped. 2017 has seen a retreat of these prices but with elevated prices in a market already swamped with oversupply, is the writing on the wall for the steel market?

Coking coal, a vital material needed to make steel, enjoyed bumper profits last year on the back of a price rally that made it 2016's best performing commodity. Prices skyrocketed to US$300 a tonne in the second half of 2016 as China increased coal imports by over 40 million tonnes in response to its policy of cutting the number of coal mining operation days from 330 to 276 in a year. The rationale behind China's policy of reducing mining operation days has mainly been linked to the government's drive to reduce emissions notoriously associated with the coal and steel industry and driven in part by the need to increase prices to enable domestic miners to repay their loans to state banks. However, while China sought to tighten its supply tap one way, another branch of the government ramped up the demand for steel by introducing a credit stimulus which spurred construction projects hungry for steel.

China intervention