Chinese power shortages not good for the steel supply chain

The threat of power outages is alive and well in China, adding to pressure on iron ore prices that is already coming from other fronts.

China is facing potentially serious power shortages this summer due to critically low water levels in major hydroelectric producing regions of central China after the worst drought in 50 years.

Add in very low coal stocks at some major power stations, and you have a recipe for trouble in the Chinese steel sector. The prospect of fewer viable working hours ahead means less demand for iron ore to turn into steel, and that in turn has already depressed ore prices.

Chinese spot iron ore prices have sunk $7 to $10 per ton over the last few weeks, with the lowest offers now clocking in at $180 per ton.

This reflects a more cautious approach to raw material purchasing from the country’s domestic steel mills — and we have seen similar trends in copper and other bulk commodities.

There is a view that inventories are high enough so the mills are in position to de-stock. But according to other theories out there, China has intentionally stayed out of the commodity markets to see what would happen to prices if they stepped away for awhile.

These theories are the silver lining in a trend that overall is troublesome to the producers of coal, copper and especially iron ore.

The obvious stocks to think about here are VALE (quote), CLF (quote) and BHP (quote). But be careful anywhere the market has already priced in a lot of Chinese demand.

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