We’ll remember 2016 as the year in which steel prices bottomed out thanks to higher-than-expected demand in China.
China, once again, increased infrastructure and property construction spending. As a result, steel prices rose.
China’s primary growth engine — and, therefore, that of industrial metals demand — was fired up one more time. Some people might think that what drove steel prices this year was the imposition of higher trade barriers. While that did help prices, the real driver sustaining the rising trend in steel prices was the aforementioned higher-than-expected demand in China.
Chinese hot-rolled coil price. Source: MetalMiner IndX.
Many analysts expect the country’s demand growth rates to slow down this year. Some Chinese cities have tightened their home purchasing rules to prevent their property markets from overheating. Also, China’s car sales could lose momentum if China doesn’t extend the tax break for small cars in 2017.
However, this year, the key driver won’t be demand as much as supply. China’s pollution problems could very well disrupt the supply of the world’s largest steel producer.
Cities in China have for years been choking on the smog spewing from China’s industrial production sector but things are recently getting much worse. Two weeks ago, authorities asked 23 cities in northern China to issue red alerts as inspection teams scoured the country. The scale of the red alert measures show that the Chinese government is taking air pollution seriously.
Why Should This Matter To You?
China’s energy consumption is mostly driven by its industry sector, the majority of which comes from coal consumption. Coal burning is the biggest contributor to air pollution in China. One of the principal users of coal, and therefore most polluting, is its steel industry.
China has previously applied stricter anti-pollution rules and supply-side reforms designed to cut capacity in the coal and steel sectors, which helped push prices up. Now that the situation is getting unbearable for citizens, China has no choice but to get tough in its self-declared “war on pollution.” The result is that we could see significant supply disruptions in China’s metal production sector, particularly in steel. I believe this will be a the new determining factor in metals/steel pricing this year and it’s a bullish one.