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Dec 12, 2017

         Although prices for commodities, including steel, have risen sharply in recent times, that does not mean it will continue.

In the past few months, China's steel prices, including steel, have rallied broadly. The rise in steel futures prices, up 47 per cent this year, has fuelled appetite for spot iron ore from steelmakers. International iron ore prices have hit a record high since January 2015, with 62 per cent of the company's taste for iron ore rising more than 20 per cent in the past week.

         Still, there are investors who say the overoptimistic sentiment and the short-term rise in prices due to supply constraints are some of the overhyped signs.

         The international iron ore giant has not followed this upward trend. BHP billiton, the Australian mining giant, said demand growth in China was slowing and that coal and iron ore prices were unsustainable. BHP billiton announced a 10 million to 260 million metric tons of iron ore guidance for the 2016 fiscal year. Brazil's vale also said iron ore production in the fiscal year of 2016 was roughly the same as in 2015.

          The sharp rise in steel prices is less attractive for producers to invest more resources to increase capacity. The average daily output of crude steel in early April was 2.226 million tons, roughly the same as last year. The average daily output of crude steel was slightly lower in late march than in early April, leading to a 7.4 per cent year-on-year decline in coal consumption in the country's six biggest power plants in early April.

          Concerns about the sustainability of future economic growth are important reasons for steel companies to remain cautious, which could lead to a pullback in steel prices that are now rising too fast. China's 6.7 per cent GDP growth rate was ideal in the first quarter, but that was more of a result of a lot of credit and real estate policy adjustments. In the first quarter, China's banking system launched a credit scale of 4.61 trillion yuan. Loose monetary and credit policies, as well as looser housing policies, have pushed money back into the real estate sector. Property prices in first-tier Chinese cities rose sharply in the first quarter, which has led to a government clampdown on possible risks in the sector.

           A large amount of credit has stimulated economic growth and has produced macro risks to China's economy in the medium to long term. Most believe that the current monetary policy of the central bank is difficult to continue and that monetary policy has a very high probability of being neutral. Without the support of monetary and credit, whether real estate and infrastructure investment, which will boost China's economic growth in the first quarter, will continue to add momentum to economic growth. Over the past many years, the construction industry, including real estate and infrastructure, has consumed more than half of all Chinese steel products.

           The current high prices of steel products and futures are more likely to be the result of capital promotion. In fact, not only the steel products, such as copper, zinc and other non-ferrous metal products and agricultural products have increased dramatically in the near term. There is so much liquidity in the market that a lot of people are looking for opportunities. The report, issued by societe generale, also believes that "a lot of social idle money flowing into the market to hype up steel prices is also an important factor in the steel price increase in this period."

            Recently, the media, including the xinhua news agency, have raised risk warnings about the current rise in commodity prices. The Shanghai futures exchange has also raised transaction fees on commodity futures, including rebar and hot-rolled rolls.


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