China: Iron ore market dynamics, near term outlook

Recent ferrous futures market sentiment has been better. As prices are at their lower bound valuations, a combination of macro and fundamental developments had led prices rebound. Last week, we highlighted that from a valuation perspective, one can consider to long DCE iron ore far-month contracts 2505 at CNY 760/t or $90/t.

As the rainfall subsides (for now), yesterday's steel data from the two sources lifted the market sentiment further as they revealed a decrease in rebar inventory despite an increase in production.

The market is currently taking the view that steel (mainly rebar) inventory will improve w-o-w. From the seasonal change in consumption with South China yet to exit the rainy season and high temperature in the north; steel mills are cautiously maintaining low production to cope with the weak demand condition. Hence, the current fundamentals, at most, can only support no systematic decrease in production and not an increase.

Furthermore, upstream and downstream iron ore inventory is high. Futures prices and spot transactions have moved inversely. With no production increase, iron ore offtakes from ports are also capped.

With the surge in departures during June, iron ore arrivals in China are expected to increase in July. A demand of 2.4Mt/day of hot metal production and 3.1Mt/day of iron ore offtakes from ports will not be sufficient to ensure destocking. Spot supply excess is still the biggest hindrance that pressures iron ore prices and calendar spread.

That said, the real iron ore supply pressure is smaller than the total inventory scale when we consider the 1) ports inventory structure (mainstream vs non-mainstream stocks and high-grade vs mid-low-grade stocks) 2) negative import margins, and 3) an apparent increase in floating inventory.

Note: This article has been written in accordance with an article exchange agreement between Horizon insights and BigMint.