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Cashed-up Chinese steel mills chase high-quality iron ore

Cashed-up mills throughout China are buying up high-grade iron ore to ramp up production and take advantage of elevated steel prices.

Traders and analysts reported a surprising urgency among mills, which have seen their profits turn around during the past year, to replenish stocks after the Chinese New Year holiday and increase utilisation rates.

This is being driven by reports of a pick-up in spending on railways and other infrastructure this year, as well as the government’s move to close down production of low-quality steel made from scrap metal. Some mills are concerned the yuan will depreciate further, making their iron ore purchases more expensive down the track, and there is also speculation the government could force mills to suspend production in March for the National People’s Congress, the annual meeting of China’s parliament, to reduce heavy smog.

Many of China’s key steelmaking provinces are close to the capital, Beijing.

“Over the past year, China’s steel mills have increased profits, they have better cash flow, leaving them with more money to buy raw materials,” said Qiu Yuecheng, an analyst at steel trading platform Xiben New Line E-commerce Company.

“They are preferring to buy higher-grade iron ore to increase productivity.”

The fortunes of steel mills have turned around as prices surged more than 70 per cent in the past year. However, there is concern higher prices are being driven by speculation rather than underlying demand. Indeed, there is some uncertainty around the outlook for steel demand as China’s property market slows down in line with government efforts to rein in credit.

The S&P Global Platts China Steel Sentiment Index released on Tuesday showed the outlook for new domestic orders fell for a fourth consecutive month in February.

“There is an increasing disconnect between steel prices and underlying demand,” said Paul Bartholomew, a senior managing editor of steel and raw materials for S&P Global Platts.

He said the steel and iron ore futures markets, which now attract a lot of retail investors, were having a big impact on commodity prices. Those retail investors respond quickly to any announcements on infrastructure spending or other policy decisions that might affect the steel sector.

Recently, they have reacted to the Chinese government’s move to close down production of low-quality steel made from scrap metal. Analysts predict this type of steel accounts for about 50 million tonnes of production a year. The expectation is that production cuts in this part of the sector will boost demand for steel made from iron ore.

“The iron ore price will remain strong in the following one or two months,” said Xu Xiangchun, chief information officer at Mysteel. “It depends what government policies are announced.”

Du Hongfeng, a senior analyst at research group SteelHome, said recent strong sales of heavy trucks and excavators were also a sign of a pick-up in activity, which could benefit steel producers, and he expects infrastructure investment to increase this year.

Source: Australian Financial Review

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