Big Sell Off Hits Steel Prices as Chinese Regulators Step In

21 November 2016

Panic hit steel market this week, with traders taking China’s tightening of trading regulations as reason to liquidate some of their positions. This follows steel’s surprising rally this year, which has shown resilience late into the year despite some expectations for a reversal.

Late last week, China tightened its trading regulations on some steel-related commodities, including iron ore and coal, while its exchanges also implemented restricted measures on some companies after finding they were violating trading rules.

This prompted some panic selling, and steel commodities in China tumbled. China’s steel-rebar benchmark saw steep losses mid-week, with futures falling as much as 6% during Wednesday’s session before moderating their losses. Iron ore, the critical steel making component and the main subject of much of the trading regulations hit a one-year high Monday, then tumbled, losing about 12% of its value in only two sessions.

Steel futures soared this year as China moved to stimulate its economy by increasing its infrastructure and real estate spending, and that sent steel prices higher. Also adding to the upside, was China’s indication that it would trim its steel overcapacity. While there were conflicting reports on whether or not China would actually meet this promise, this week the country said it had already met its 2016 goal for a 45 million ton capacity cut. The country is supposed to continue output cuts into next year.

While the increased regulatory measures have provided some panic selling on a rally largely caused by speculative buying, beyond China’s output goals there are other factors that are fundamentally supporting steel and could support steel prices including low metallurgical coal availability, and low inventory at steel mills. Furthermore, China’s infrastructure spending is expected to continue through at least the first half of next year. After that; however, questions remain into the sustainability of the stimulus programs due to the large amount of debt that the country has acquired in boosting its economy. A cutback in infrastructure spending would pressure steel prices.

Source – Economic Calendar