Chinese steelmakers not benefiting from weaker yuan although a sudden cooling in iron ore price offers some relief

Chinese steelmakers have seen their profit margins squeezed by surging prices of imported raw materials while the depreciating yuan has dealt an added blow.

A partial relief is on the way, analysts say, at least on iron ore prices, as they expect a price correction that began last week to continue as the speculative boom gives way to fundamentals-based trading.

But coking coal prices are expected to remain elevated for longer as new supply takes time to come to the market.

“The iron ore price of [almost] US$80 a tonne seen earlier this month has gone far out of line with industry fundamentals,” Shanghai-based Sinolink Securities’ analysts said in a recent note. “It was in bubble territory and not sustainable.”

The fact that the yuan is expected to devalue further next year after having depreciated almost 6 per cent against the US dollar so far this year has not helped the bottom lines at steel mills since they primarily sell to the domestic market and their products are priced in yuan.

HSBC’s currency strategists last week forecast the yuan would tumble almost 5 per cent against the greenback by the end of next year.