Finally, Some Possible Relief for Steel Prices
A confluence of factors have contributed to the price of Iron Ore coming down in a meaningful way. This is could contribute to solid relief for Steel prices, as Iron Ore is a key ingredient in the Steel making process.
You have likely heard of Evergrande’s debt crisis. Evergrande is the second largest property developer in China. They have hundreds of construction projects going on across China. They currently have over $300 billion worth of liabilities. It’s reported they are not making payments to vendors. As their activity grinds to a halt, their demand for steel evaporated. This is taking some pressure of the commodity and the commodities involved in its production. Bank of America calculated that their activity accounts for 29% of demand for steel on a global level.
Also in China, Beijing has put forced steel production cuts into effect. This is for two reasons – One to slow down the hyper level of construction and another in their plan to fight climate change.
Iron ore is now around $94 a ton versus $233 a ton in May 2021.
Steel production is rising across the globe. From Italy, to the US, to India. As production ramps up that means more supply. Which in theory should contribute to the decline in prices. Steel firms are in good shape with record profits, so they can allocate that towards increased production and new projects. Hopefully some of that money is being deployed to develop “green” steel. See our previous blog post on that topic.
Another factor is the idling of vehicle production by the like of GM and Toyota. Less production means less demand for steel. Also car makers have been shifting away from steel. Ford has produced the F-150 with an aluminum body since 2015. Looking back that was a smart move! This will continue to put a dent in steel prices.
Looking forward, a weaker economy may be in store next year. The economy is running hot and inflation is at levels not seen in 13 years. If the economy overheats, the demand for steel will most certainly drop, and possibly significantly.
If you’re into charts (link: https://tradingeconomics.com/
commodity/steel), you’re familiar with the “double top”. If you look at a chart of the price of steel, it looks like a double top has been achieved, with the price spiking in May, a decline over the summer, and another spike in September. This is sometimes an indicator that the rally is losing steam. The problem is chart analysis is that it’s not taking a lot of factors into account. It’s not a sure thing, just an indicator.
These days, it’s almost impossible to predict how things are going to play out. It looks like we may have some relief from high steel prices, albeit temporarily. There are certainly many factors that could come into play to make the price continue to climb. For example if the infrastructure bill passes, there will be a flood of money deployed on projects that need steel.
Keep your eye on Evergrande, automobile production and the state of the supply chain. We’ll have an update next month!