Rally lifts global iron ore market but won't last long: analysts
A short-term rebound in demand and market speculation have led to a price surge in the domestic steel market, but the gains will be transitory because overall demand and overcapacity issues persist, analysts said on Wednesday.
Steel prices in China surged in recent days, despite overcapacity in the industry that the government has vowed to tackle. The price for steel billets in Tangshan, a major city for steel production, in North China's Hebei Province, increased more than 20 percent, or 360 yuan ($55.3) per ton, in the past five days to 2,140 yuan per ton, the Beijing News reported on Wednesday.
Since the Spring Festival holidays in mid-February, the price of steel billets has risen by 37 percent, or 580 yuan per ton, according to the Beijing News report.
"This is crazy and unprecedented," said Wang Guoqing, research director at the Beijing Lange Steel Information Research Center.
"There might be a short-term rebound in steel demand, but this is unusual," Wang told the Global Times on Wednesday.
"Demand for steel has rebounded in recent days as a traditional peak season for construction during the spring and summer is approaching," said Wu Wenzhang, general manager of Beijing-based industry consulting firm Steelhome.
The temporary rise in demand partly reflected persistent declines in steel inventories in recent months, which prompted traders to replenish supplies to prepare for the peak season, Wu told the Global Times on Wednesday.
However, the price surge has mostly been driven by speculators, not fundamental demand, according to Wang.
"As the country is determined to cut overcapacity in the steel industry by 150 million tons in the next five years, some traders are betting on a decline in steel supply," Wang told the Global Times Wednesday.
In addition, an international horticultural exhibition in Tangshan, which is scheduled to run from May to October, might be sparking market speculation that steel mills around the city will be closed to ensure better air quality during the event and steel production will decline as a result, Wang noted.
The price surge in China in turn led to a price rise in the global market for iron ore, a key steel input.
Iron ore is the latest raw material to join the global commodity price rally.
The price of iron ore has risen 46 percent since the beginning of the year and 70 percent since December 2015, when it hit a record low, the Financial Times reported on Wednesday.
On Monday, the iron ore price jumped nearly 20 percent, the biggest daily increase on record, according to the Financial Times (FT). The iron ore price on Wednesday was around $55.09 per ton, according to the FT report, citing data from Reuters.
As China relies heavily on imported iron ore, the price surge in the domestic steel market will boost global iron ore prices, according to Wang.
However, speculative forces might have also played a major role in lifting iron ore and other commodity prices, said Wang Jun, deputy director of the Department of Information at the China Center for International Economic Exchanges.
"I believe [the rally] is more a reflection of speculation than an actual improvement in the Chinese or global economies," Wang told the Global Times Wednesday.
He said global markets might be overacting to a recent quantitative easing measure by the People's Bank of China, the central bank, which cut banks' reserve requirement ratio, as well as the Chinese government's goal to keep GDP growth above 6.5 percent.
"But the fundamentals of the slowing Chinese economy have not changed and domestic and global demand have not improved, so the current price surge is simply unsustainable," Wang said.
