Keep an eye on steel and iron ore prices

Steel is used for everything from cars to energy equipment. American steel firms are gloomy, says Bob Tita in The Wall Street Journal. Mills are operating at 56% capacity because of a sharp drop in demand. The price of a “hot-rolled coiled sheet of steel” is now 50% off a July 2018 high. The oil price crash means little demand for new drilling rigs, while the idled auto industry has cost the steel sector $1bn in lost sales.

Producers of iron ore, the main ingredient used in steel, are more optimistic, says Neil Hume in the Financial Times. Chinese steel production remained resilient during its coronavirus lockdown, allowing iron ore prices to stay above $80 a tonne despite the wider commodity price slump. Miners BHP and Rio Tinto seem confident that China’s recovery will fuel renewed demand for raw materials. The country is the world’s top consumer of the “rust-coloured rock”, using it to churn out roughly one billion tonnes of steel last year.

Steady Chinese steel production was not driven by market forces but by government support, says Kieran Clancy of Capital Economics. Local steel stockpiles have “ballooned” and the industry will eventually have to bow to the inevitable and follow the rest of the world in cutting output. That will weigh on iron ore prices, which we think will fall to $60 a tonne by the end of June.