Steel Correlations

Lows in U.S. Hot Rolled Coiled Steel prices are correlating with the stock prices of selected steel companies.

Cleveland Cliffs (CLF.N) is the featured comparison in the chart below.

September 1, 2022

by Rob Zdravevski

Australian steel prices to stay elevated

Did you know that the price of Australian Premium Coking Coal has more than halved in the past 5 months?

The chart below shows it now reaching Oversold levels (on a weekly basis) and it has mean reverted to its 200 week moving average.

For the buyers of this coal (steel companies), this is good news. Their input prices are cheaper.

When you combine that with the price of shipping (as per the Baltic Dry Index) and Iron ore have both fallen 60% in the past 3 months…..then these cheaper ‘inputs’ bode well for steel producers.

However, the lower price being achieved for coking coal is carrying weight in the decisions of mining companies such as Australian headquartered, South 32, who has decided against proceeding spending $700 million to extend and expand the life at an existing metallurgical coal mine in New South Wales.

This follows its January 2021 decision to not develop a project in Queensland. It is now looking for a buyer of its 50% interest.

In both cases, South32 cited the allocation of capital didn’t support an adequate return nor making the projects financially viable.

Instead, they are opting to focus on North American projects, which is a ‘friendlier’ jurisdiction.

Beyond the ESG and political landscape, I also speculate the greatest risk comes from how the projects would be financed.

Furthermore, combine less supply of coking coal for local steel manufacturers, Australian tariffs on steel imports, China’s tariffs on its steel exports and a tight labour market…….domestic Australian steel prices aren’t about to decline anytime soon.

August 24, 2022

by Rob Zdravevski

China’s climate policy in disguise

I heard of import tariffs but not export tariffs

Is exporting inflation, China’s new ‘weapon’?

Maybe this is part of China’s net zero emission plan?

Would you like to know why HRC (hot rolled coil steel) prices have quadrupled in the past year?

The world’s largest steel producing nation has been imposing and increasing tariffs on its own steel exports.

I’ll repeat, Chinese companies are required to pay a tariff in order to export their product.

High purity Pig Iron exports attract a 20% tariff while Ferrochrome stands at 40%.
Furthermore, China has removed export tax rebates for 23 steel products including flat and rolled steel)

This is quite incredible. 

It is quite normal for nations to impose a tariff on goods being imported onto their shores and limit ‘product dumping’ but to ‘discourage’ your own corporations from global competition and profits is an extraordinary tactic.

In 2020, total world crude steel production was 1877.5 million tonnes (Mt). The biggest steel producing country is currently China, which accounted for 57% of world steel production in 2020.

The next 6 countries (regions) account for a combined 28.4%. 

They are:
#1 EU  7.4%
#2 India  5.3%
#3  Japan  4.4%
#4 U.S. 3.9%
#5 Russia  3.8%
#6  South Korea  3.6%
#29 Australia 0.3%

Australia’s annual steel production is 5.5Mt, ranking behind the production of Bangladesh, Austria, Malaysia and Belgium.

One-third of Australia’s steel needs (nearly 2Mt) are imported, with most it coming from China. The rest is supplied by local manufacturers such as Bluescope Steel.

So, the news becomes even more alarming when the amount of steel imported from China has fallen by 50% in the past several months.

Can you see how half of 2Mt is a pittance of China’s 1,065Mt worth of annual production yet it has a pronounced effect on Australian business.

But what is China export tariff strategy telling us?

Firstly, China is ‘ring-fencing’ some its industrial production perhaps its seen as a form of ’nationalism’ but more so, I see it as securing or better yet, retaining its supply for its own consumption.

This could also be a measure of protectionism, but this is not new because western economies already do it themselves.

When you have a powerful (and enviable) position such global ‘market share’, you can withhold supply, causing localised prices to rise, thus hurting industry and consumers in far away locales.

Whilst imposing tariffs of steel exports will accentuate output gaps in all those other nations and higher prices may remain, by sacrificing some capitalist profits, this may be one aspect how China will reduce its carbon emissions…….

Have a think about that notion?

In addition, after decades of the global juxtaposition of China exporting deflation (and many enjoying lower prices), China may be now “exporting” inflation. 

It may be the definition of being ‘careful what you wish for’.

With its own currency testing multi-year highs (helping put a lid on its own inflation rate), could China’s new export to the world actually become Stagflation?

Don’t forget to subscribe to my blog to receive other notes, the moment they are published or equally feel free to email with a question or comment.

Until next time,

Warm Regards,
Rob Zdravevski

Iron Ore prices rise 33%

Did you know that over the past 6 weeks, the spot price of Iron Ore has risen 33% back to $120 per tonne?

Some investors may not believe this as they are still anchored to the bad news they saw last month with headlines such as ‘Iron Ore Prices Plummet”.

Credit to London’s Financial Times who did report the positive news this week.

source: Bloomberg





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