China: Is there a bottom for ferrous commodities?
...
Horizon Insights: The domestic steel prices in China have witnessed a decline this week. Chinese rebar prices have fallen by RMB 160/t ($22/t) w-o-w, while HRC prices have fallen by RMB 120/t ($17/t). On monthly basis, rebar price have come down by RMB 130/t ($18/t) and HRC price have come down by RMB 84/t ($12/t).
Factors driving down prices -
1. The reality of weak and flat domestic demand continues, and the Third Plenum has landed without stimulus.
2. There is a marginal decline in domestic manufacturing demand, and downstream processing profits and price differences in sheet metal varieties are shrinking.
3. There is no problem with exports in the short term, but there is a risk of natural decline in the fourth quarter.
4. Expected impact of the replacement of old and new national standards on rebar in the mid-term.
Valuation:
1. Currently, the price is lower than the lowest cost of EAF production, but from a spot price perspective, the derivative market price is still higher, with a 2410 contract premium of around 100 yuan/ton.
2. Plate steel is the backbone of digesting the hot metal production in the past two years. Once there is pressure on indirect exports, it will eventually be transmitted to the production of molten iron, thereby affecting the expected balance sheet of raw materials. When the market begins to reach a consensus on reducing production of molten iron, there will continue to be a clearing premium market for iron ore spot prices in US dollars and coking coal spot prices with valuation premiums.
Nowadays, the discussion in the market is mostly focused on: Where is the bottom line?
In this round of decline, there is currently no strong contradiction in the balance of steel. Under the neutral inventory, the market cannot provide an expected increase in production, which has led to the peak of the imagination space for molten iron. At the same time, the balance sheet of raw materials has deteriorated significantly compared to the first quarter, with coal and iron elements accumulating synchronously, and iron ore inventory pressure is evident.
Therefore, this round of ferrous decline is more due to the disappointment of demand expectations and the downward movement of production costs.
How to view the bottom of steel valuation?
From a cost perspective, if iron ore is priced at around $90, coking coal is valued at around 1400 yuan/ton based on warehouse warrant price, and rebar is theoretically supported around 3200 yuan/ton. If spot price premium is considered, the current spot price should be around 3200-3300 yuan/ton (excluding extreme prices in some regions).
Therefore, from a purely valuation perspective, we tend to lean towards the profit taking reference of around 3300 yuan/ton for current short positions.
HRC is affected by the short-term lack of bright spots in demand expectations, and the HRC and rebar price difference has no drive.
Note: This article has been written in accordance with an article exchange agreement between Horizon insights and BigMint.