Fitch warns steel prices are about to fall even lower in the near-term

Jessica Morris
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Chongqing Steel To Start Relocation Program In This May
The recent jump in Chinese steel prices isn’t sustainable (Source: Getty)

Fitch has warned steel prices will fall even lower in the near-term, as Indian conglomerate Tata Steel desperately searches for a buyer of its Port Talbot steelworks.

Low prices have played a key role in the crisis gripping Britain’s steel industry, leading to the closures of steelworks and thousands of job losses up and down the country. Earlier this year, Tata announced the sale of its UK business, which was losing £1m a day.

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Steel prices have jumped around 50 per cent so far this year, helping so-called zombie mills in China resume production. The jump in output, coupled with weak demand growth for steel in 2016, will put significant pressure on prices in the near-term, Fitch added.

As suspended furnaces fired up, daily crude steel production rose to 2.28m tonnes in March, up 12.9 per cent compared to the previous two months. Average daily crude steel production had been lower in January and February, coming in at around 2.02m tonnes, compared to 2.21m tonnes last year.

But the credit ratings agency said the recent jump in Chinese steel prices isn’t sustainable. This is because it's driven by a seasonal pick-up in construction, as well as elevated speculation in the market.

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Goldman Sachs said last week that this year's commodity rally isn't supported by a sustainable shift in fundamentals. Iron ore, a key steelmaking ingredient which has gained nearly 30 percent this month, will fall to $35 per tonne by the end of 2016.

"The current rally is unsustainable in the absence of a material increase in Chinese steel consumption that can absorb incremental supply from mine expansions in Australia, Brazil and other regions," it said in a note.

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