by Kyle Fitzsimmons on JUNE 2, 2016
With iron ore and steel prices on the decline, many are looking to Chinese demand to provide a much needed boost, but that boost may not be as significant as once thought.
According to a recent report from The Wall Street Journal, any uplift provided by demand from China will be limited.
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“Since climbing 54% between the start of the year and late April, front-month futures for Shanghai steel rebar have tumbled about 30%,” wrote Abheek Bhattacharya for the WSJ. “Steel’s rally helped send the benchmark physical price of its key ingredient, iron ore, 60% higher. It peaked on the very same April day, and has since fallen by 27%.”
The reason for this weakening market? Chinese regulators who have hindered matters by increasing margin requirements and transaction fees on both iron ore and steel futures. This is beginning to slow the speculation that boosted prices to begin 2016.
Bhattacharya added: “Though futures speculation lighted the fire, investors should keep one eye on underlying commodity supply, which may have been the original tinder. Steel traders started the year with the lowest level of inventory in four years, producing a squeeze when a seasonal uptick and some stimulus measures drove up demand after the Lunar New Year.”
Chinese Yuan Devalued Again
Just this week, the People’s Bank of China further devalued the yuan to its lowest point in five years. Though the actual reduction was small, the currency’s value has now fallen three weeks in a row leading back to the end of April.
It’s important to note that this devaluation did not send the world markets into a downward spiral as it did last August.
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