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admin | Category: Shipping Storage Containers | 01.10.2013
Domestic hot-rolled steel prices in China stood at 3,463 renminbi per mt (metric tonne) on November 18, according to Antaike Information Development Company. According to RS Platoua€”an international ship and offshore brokers and investment banka€”weaker steel prices suggest that Chinese steel output is currently running at a higher rate than demand and the need to build further inventories of iron ore has disappeared, which had negatively affected the Chinese iron ore market and Capesize rates.
Investors might notice how steel prices have moved closely with dry bulk shipping rates (not shown above). On September 25, the domestic spot price for hot-rolled steel in China stood at 3,575 renminbi per mt (metric tonne). Prices of imported iron ore have risen since June as well on the back of higher industrial activity, following actions by the government to stabilize growth.
At the start of the year, prices for iron ore and coal were higher because of increased industrial activity in China.
When mining operations resumed in the Southern Hemisphere during the second quarter, iron ore prices fell. This doesna€™t apply when higher purchases are driven by increased supply and lower prices. Prices recently hit as low as 3,461 renminbi per mt on October 29, before bouncing back up.

As the steel industry is rather important to Chinaa€™s employment growth and economy, ~3,400 renminbi may be the minimum the government tries to support. When prices for materials such as steel, iron ore, coal, oil, and copper rise, they can follow demand thata€™s rising faster than capacity can increase. Prices were rising since the end of May at 3,436 renminbia€”which was near the lows of 3,400 during the financial crisis. That has negatively affected Augusta€™s import data, however, as the difference between domestic and imported iron ore prices diminished. The wet season in Southern Hemisphere countries such as Brazil and Australia, which typically spans from December to March, also contributed to the higher prices.
The decline in steel price reflects a looser supply-to-demand balancea€”output running higher than demand. When steel prices came down, so did dry bulk shipping companies and ETFs like Diana Shipping Inc. This also means higher shipments and shipping rates as well as share prices for dry bulk shipping firms.
This also occurred in mid-2012, before the government initiated stimulus programs to energize the economy.

Nonetheless, prices have come off of their recent high of $140 to $131.5 per mt (metric tonne) on September 17, which appears to be driven by increased supply of iron ore from southern countries such as Australia and Brazil. When economic activity rises, the prices of materials like steel and iron ore rise because suppliers cana€™t increase supply as quickly. This happened in November 2005, October 2008, and September 2012a€”all of which historically marked the bottom of the Chinese stock market too.A So while the recent declines in steel prices might have contributed to weaker iron ore trade, investors may expect steel prices to rise over the medium to long term, which is positive for shipping. Since public steel companies play an important role in keeping citizens employed, that price level could be the support line the government wants to maintain and something investors may want to keep in mind.A The recent decline in steel prices most likely reflects an increase in steel output and supply rather than weak demand. As the price of steel falls, demand for the industrial good should rise, which will further support economic activity and iron ore imports. But this is likely driven by higher demand rather than lower supply because shipping rates have been on the run.
On a side note, Chinaa€™s September HSBC Flash Manufacturing PMI, which is largely viewed as leading indicator of the strength of Chinaa€™s economic activity, rose and beat estimates.

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