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China Commodity Call
Bullish on tight iron ore supply, steel
demand more difficult
We have continued to spend time actively engaging with market participants
throughout the ferrous metal supply chain. We remain very positive on iron
ore, with some of the feedback from meetings suggesting a sharp rise in
Indian costs and even more pressure on supply. However, we are still a little
cautious on steel demand. Although traders and end-users have not been
overtly negative, there are no expectations for a rapid upturn in the pace of
transactions in the near future.
Overall, though, we believe a combination of tight supply and tighter credit
conditions means that iron ore inventory at the mills and steel inventory at end
users is much lower than a year ago. In our view, this greatly reduces the
downside risk to both steel and iron ore prices as there isn’t the inventory
buffer to allow for an extended purchasing hiatus. Meanwhile, iron ore prices
will continue to push up as mills restock.
Indian iron ore – pushed to the top of the cost curve?
We spoke to an Indian trader who ran us through the costs involved for
getting ore from a mine in Orissa to China. Following successive hikes in rail
freight rates and the increase in the export tax costs have increased by as
much as $40/t since the start of 2011, reaching nearly $150/t at the margin.
Cost hike adding to Indian supply pressure
The reduction in shipments from India resulting from the ban on exports from
Karnataka is well understood. However, the sharp rise in the cost of exporting
has reduced supply from other areas as well. Traders who had pre-ordered
material from mines before the rise in export tax and before prices turned
down have seen their potential profits disappear and are holding back
material until prices recover further.
Steel demand trends less clear
Traders we spoke to in Shanghai over the last week were decidedly cautious.
Sales are not great, but mixed across end use senders (autos weaker,
machinery stronger, white goods and construction flat). One trader reported
that while the volumes of orders from some of his customers were the same
size as a year before, the frequency of orders had come down.
We also spoke to a manufacturer of construction machinery. For that
company, business was good with sales of loaders up over 20% YoY and
excavator sales up 170% following the addition of capacity at the end of last
year. Demand from infrastructure projects was particularly strong, with sales
for projects related to water storage and transportation now making 20% of
total sales.
Developers were not said to be slowing the pace of construction but they are
becoming more conscious of cash flow. With developers’ inventory of new
units still less than six months of sales, the view was that it is still reasonable
to expect a seasonal uplift in construction activity into 2Q.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
China Commodity Call
Bullish on tight iron ore supply, steel
demand more difficult
We have continued to spend time actively engaging with market participants
throughout the ferrous metal supply chain. We remain very positive on iron
ore, with some of the feedback from meetings suggesting a sharp rise in
Indian costs and even more pressure on supply. However, we are still a little
cautious on steel demand. Although traders and end-users have not been
overtly negative, there are no expectations for a rapid upturn in the pace of
transactions in the near future.
Overall, though, we believe a combination of tight supply and tighter credit
conditions means that iron ore inventory at the mills and steel inventory at end
users is much lower than a year ago. In our view, this greatly reduces the
downside risk to both steel and iron ore prices as there isn’t the inventory
buffer to allow for an extended purchasing hiatus. Meanwhile, iron ore prices
will continue to push up as mills restock.
Indian iron ore – pushed to the top of the cost curve?
We spoke to an Indian trader who ran us through the costs involved for
getting ore from a mine in Orissa to China. Following successive hikes in rail
freight rates and the increase in the export tax costs have increased by as
much as $40/t since the start of 2011, reaching nearly $150/t at the margin.
Cost hike adding to Indian supply pressure
The reduction in shipments from India resulting from the ban on exports from
Karnataka is well understood. However, the sharp rise in the cost of exporting
has reduced supply from other areas as well. Traders who had pre-ordered
material from mines before the rise in export tax and before prices turned
down have seen their potential profits disappear and are holding back
material until prices recover further.
Steel demand trends less clear
Traders we spoke to in Shanghai over the last week were decidedly cautious.
Sales are not great, but mixed across end use senders (autos weaker,
machinery stronger, white goods and construction flat). One trader reported
that while the volumes of orders from some of his customers were the same
size as a year before, the frequency of orders had come down.
We also spoke to a manufacturer of construction machinery. For that
company, business was good with sales of loaders up over 20% YoY and
excavator sales up 170% following the addition of capacity at the end of last
year. Demand from infrastructure projects was particularly strong, with sales
for projects related to water storage and transportation now making 20% of
total sales.
Developers were not said to be slowing the pace of construction but they are
becoming more conscious of cash flow. With developers’ inventory of new
units still less than six months of sales, the view was that it is still reasonable
to expect a seasonal uplift in construction activity into 2Q.
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