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Steel prices climbed throughout the year; futures for a tonne of hot-rolled coil were around $1,923, up from $615 last September, according to an index.Meanwhile, the price of iron ore, the most important component of the steel business, has fallen by more than 40% since mid-July.Demand for steel is soaring, but demand for iron ore is falling.
A number of factors have contributed to the high price of steel futures, including tariffs imposed by the Trump administration on imported steel and pent-up demand in manufacturing after the pandemic.But China, which produces 57% of the world’s steel, also plans to scale back output this year, with implications for both steel and iron ore markets.
To curb pollution, China is downsizing its steel industry, which accounts for 10 to 20 percent of the country’s carbon emissions.(The country’s aluminum smelters face similar restrictions.) China has also increased export tariffs related to steel; for example, from Aug. 1, tariffs on ferrochromium, a component of stainless steel, doubled from 20% to 40%.
“We expect a long-term decline in crude steel production in China,” said Steve Xi, a senior adviser at research firm Wood Mackenzie.”As a heavily polluting industry, the steel industry will remain the focus of China’s environmental protection efforts in the next few years.”
Xi pointed out that the production cuts have led to a drop in iron ore consumption.Some steel mills even dumped some of their iron ore stockpiles, raising alarm in the market, he said.”The panic spread to traders, leading to the slump we’ve seen.”
Mining companies are also adjusting themselves to China’s new production targets.”As China’s top industry body confirmed in early August, the growing likelihood that China will slash steel production sharply in the current half year is testing the bullish resolve of the futures market,” said a vice president at BHP Billiton.The mining giant, wrote in a late-August report on its outlook for 2021.
China’s squeeze on world steel supplies suggests that shortages in many products will persist until post-pandemic supply and demand stabilize.For example, car companies are already grappling with a crunch in semiconductor chip supplies; steel is now also part of a “new crisis” in raw materials, a Ford executive told CNBC.
In 2019, the U.S. produced 87.8 million tons of steel, less than one-tenth of China’s 995.4 million tons, according to the worldsteel association.So while U.S. steelmakers are now producing more steel than they have been since the 2008 financial crisis, it will be some time before they fill the gap created by China’s production cuts.