Steel Industry Set to Drive Up Prices in Mining Sector
The world's biggest mining companies in Anglo American (LON:AAL), Rio Tinto plc (LON:RIO), BHP Billiton (LON:BLT), Glencore (LON:GLEN) and others have performed exceedingly well of late. On Friday, 4 March 2016, mining stocks were trading at 4-month highs, with Anglo American gaining 11% on the day and BHP Billiton plc surging by 9%. Major gains were recorded by other heavy hitters of the FTSE 100 index in Glencore plc which closed approximately 12% higher on the day too.
The performance of mining stocks was the net result of several factors, notably an increase in the price of Brent crude oil and WTI crude oil to $38.43 per barrel and $35.72 per barrel respectively, steadily increasing demand for iron ore, copper and steel and the determination of the Chinese authorities to stabilise the economy and grow at a rate of 6.5% – 7% for 2016. It was the latter element which drove demand for iron ore through the roof on Monday, 7 March 2016 when it surged by 19% to cap its largest 1-day gain since 2009. Unfortunately there is no accepted consensus on precisely what is driving metals prices so strongly.
There is a belief that prices have been depressed for so long that any spark of positive sentiment such as widespread seasonal production in Chinese steel mills is enough to cause an epic rally in share prices. And this is precisely what is happening: Inventory levels in Chinese steel mills are running low and the country is determined to restock its supplies by running production in it steel mills around the clock. To do so, China needs the most vital component of all: Iron ore. This boosted demand for mining operations in South Africa, Nigeria, DRC, Brazil, Australia and beyond. The major mining companies in these countries include all of the aforementioned stocks. Iron ore production declined by 8% in 2015, resulting in massive losses for leading mining companies.
Sharpest-Ever 1-Day Gain for Ferrous Metal
However analysts at Goldman are concerned that too much emphasis will be placed on the sudden spike in the price of iron ore which is used in the production of steel. The price of iron ore reached as high as $63.63 per dry tonne, and despite expectations of a sharp decline in iron ore prices since Monday 7th March – the price has largely held steady. This has boosted metals across the board. Commenting on the unusual behaviour of commodities of late, Morgan Stanley (NYSE:MS) analysts alluded to the surreal nature of the commodity market. The gain in iron ore prices almost broke through the accepted definition of a bull market (+20% gains), and yet the price appears to be consolidating at that current level. Incidentally, the move towards the $63.63 price per dry tonne is the sharpest increase ever for the seaborne ferrous metal in USD.
However, caution is the order of the day in highly volatile markets. The Chinese economy is clearly on a downward spiral despite assurances from the Chinese Finance Minister that deficit spending will be undertaken to maintain GDP growth targets. The real driver of commodity prices will be demand, not sentiment. As it stands, weak demand is pervasive in China and globally. There is some encouraging news in the form of increasing sentiment with housing data in China, and this will invariably help the steel industry with increased demand. The evidence of the commodities industry can be found in China's import figures from developing countries such as South Africa, Brazil, Nigeria and others, and developed countries like Australia – the numbers are down across the board. The seasonal restocking of steel in China could prove to be a pyrrhic victory for iron ore producers, and the long-term success and sustainability of the industry is dependent on increasing demand.