China's Market Rebounds: Ferrous Chain Rises on Policy Support

Horizon Insights: Positive sentiments prevail in China's coking coal market amid the government's recent stimulus measures and elevated steel mill margins.

Yesterday's futures market was calm, despite high-level fluctuations. Meanwhile, coking coal supply remained sufficient, with high domestic production and Mongolian coal haulage. As supply strengthens, attention should be given to the rate of upstream inventory drawdown. As per projections, the inventory pressure on coking coal has diminished. However, the inventory structure, which has a significant impact on prices, appears concerning, with upstream inventory hovering at relatively high levels - this is a negative driver for prices. Hence, it is critical to observe the rate of upstream inventory drawdown as supply recovers in October.

Market insights

• On the macro front, the Ministry of Finance continues to signal proactive policy support, though not specifying the scale and composition. The market is regaining confidence after last week's NDRC meeting.
  
  
• Fundamentally, coking coal production and Mongolian coal haulage are high. There is still room for the former to increase. The positive driver for raw materials is demand, and the rate of production resumption is set to increase with higher margins. This trend will support spot prices of raw materials.
  
  
• Coke prices have undergone six rounds of price increases, totalling RMB 300/tonne (t). Based on the current margins of steel mills, there could be another two rounds of increase.
  
  
• Coking coal futures on the Dalian Commodity Exchange (DCE) are currently within a reasonable range, bounded by Mongolian (RMB 1,510/t) and Australian (RMB 11,470/t) warehouse prices. The lowest price support is the Q4 Mongolian coal long-term contract price of RMB 1,170/t (warehouse equivalent).
  
  
• At a micro level, the ferrous industry chain is in a positive trend. However, sustainability depends on whether steel mills can maintain profits to open room for spot raw materials prices to increase.
  
  

Ultimately, whether coking coal futures price references can increase will hinge on steel mills' margins. Near-term steel prices/margins will depend on macro policy developments, and to this end, participants are monitoring the actualisation of fiscal policy support. At a micro level, a rise in rebar production is accelerating, which could lead to a softening of balance sheets; conversely, HRC's balance sheet is improving.

Overall, ferrous prices are expected to be range-bound, and there is a higher certainty for steel-producing companies to lock in profits.

Outlook

• The near-term outlook for China's coking coal market depends on several factors: The rate of upstream inventory drawdown will determine whether there will be supply pressure, while steel mills' margins will dictate if there is room for raw materials spot prices to increase and sustain their upward momentum. As the market regains confidence in fiscal policies, it will be critical to monitor regulatory support and actualisation.
  
  
• However, certain risks remain: Policy support may not be as expected, while spot prices of raw materials may face resistance following the rise in futures.
  
  

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