Chinese market outlook: Navigating volatility, policy dynamics in ferrous markets

Horizon Insights: Volatility increased over the last two days with a quick surge during the day+night before (on the back of the basket of policies), and this bullishness continued during the start of yesterday before subsiding. SHFE rebar and DCE iron ore hit our upper bound price reference of CNY 3,280 and CNY 730, respectively. So the question is, what's next?

From the market sentiment and policy perspective, the market holds anticipation on domestic policies after the FED reduced interest rates - this is reflected in a price dip when the LPR decision fell short of expectations. Subsequently, the PBoC press conference not only addressed the policy rumours but signalled possibilities of more loosening and stimulus ahead - this reflects the government's attempt to lift the sluggish market confidence.

Inching closer to the October politburo meeting, there is a need for more policy support for the fourth quarter (Q4) demand after Q3's sluggishness. This suggests that in the next 1-2 weeks; it is still a relatively positive policy window in which there might be some followed-up policies being announced - the effectiveness of these policies can only be observed through the next social financing release.

From a ferrous fundamental perspective, we have previously highlighted that for prices to maintain a sustained and decent rebound (lasting for more than a month and rebound of more than 15%-20%); two conditions must be met. The first would be all-around destocking to a low level - there is no change to the iron ore inventory accumulation prospect with supplies not affected by price changes and port stock still high.

The second condition would be a rise in market confidence through policies, causing participants to increase speculative stocking - this requires a change in demand expectations. Despite the basket of policies, the market remains cautious. This can be observed from an easing spot transaction once prices weaken.

Hence, we continue to characterise this market cycle as a downcycle which has yet to reverse. Nonetheless, in the near term, we must respect the market sentiment which is rebounding weakly. Before the National Day holiday, it is recommended to avoid short risks. Directional-wise, 1) SHFE rebar price reference is still the EAF production costs. 2) iron ore remains the most optimal product to short. 3) a long futures calendar spread can be considered for steel.

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