China: Where can the increased hot metal output go?

From the perspective of iron ore itself, since the first 10 days of February, Australia and Brazil (especially Australia) have been affected by tropical cyclones, rainstorms, etc. and the shipment volume has decreased significantly. The year-on-year increase in non-mainstream shipments has to some extent offset the reduction in shipments from mainstream mines.

Due to the recovery of transportation in Ukraine and the reduction of tax rates in Iran, China annual import ore supply expectation has also increased compared to before the holidays, with a magnitude of approximately 10-15 million tonnes (mnt).

At the same time, the feedback from the export side, which was the main source of steel demand increase last year, has also weakened at the margin. In addition, currently, the inventory of various types of sheet metal has reached a relatively high seasonal level. This also means that from the bottom up perspective of the steel end, it seems difficult to find a demand sub item that can accommodate an increase of 100,000 t/day of molten iron.

Moreover, from the perspective of steel mills, the current iron ore inventory days are about 5 days higher than last year, and there is also no demand for replenishment.

The market has clearly entered a state of fluctuation. After the rapid downturn after the holidays, not only did the rebar approach the off hour electricity production cost, but the iron ore forward month contract, 2501 contract, also reached a position close to the mine production marginal cost ($90), corresponding to around RMB 750/t on the market. At least the balance sheet throughout the year is not expected to be in oversupply, this position does provoke some buying power to enter the market due to valuation considerations. At this point in time, the most fundamental new driver is still peak season demand.

The main issue lies in the direction of molten iron production - if the iron ore is expected to be depleted in mid to late March as seasonal pattern, the production of molten iron needs to reach a level of at least 2.35-2.4 mnt per day.

Our team have been conducting research on the real estate market over the past few days. The resumption of work after the holiday in East and Central China, which are less affected by the weather, is relatively normal, but there is clearly no enthusiasm for rushing to work after the holiday like in previous years. Market feedback shows that the sales and construction intensity of real estate still continue the weak pattern in the fourth quarter of last year.

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