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Set for an ex-China steel destock
Feature article
As steel producers and consumers contemplate an uncertain macroeconomic
environment with slowing growth rates, the near-term focus looks set to be on
reducing working capital. In steel, current inventory levels are by no means
high by historical standards, but there does remain some room for destock ex-
China. With apparent demand driving steel price cycles, this is likely to keep
steel prices suppressed in the near term, while the desire to run lean also
means raw materials purchases will be the minimum required. Yet again,
China is set to lead any recovery, with a cyclical need to push inventories
higher into early 2012.
Latest news
Base metals gave up a fair degree of the previous day’s gains in Wednesday
LME trading, with the continued focus on the Eurozone again being the prime
driver. Fears that the German government may seek a renegotiation of
bailout agreements previously tabled, coupled with Portugal’s Prime Minister
confirming his country would be vulnerable should any other default drive a
further bout of liquidation. Copper dropped 4.6% on the day to $7,231/t, with
liquidation continuing post-market. All precious metals also fell, with silver
down 7.3% (simply benign compared to recent days) and WTI oil down 2.3%.
Tin showed the biggest fall on the day, down 5.7% despite the threat of an
imminent Indonesian export ban. In contrast, the physical market remains
tight, with Grade A tin premiums in the US holding steady at $650/t.
With the SHFE-LME arbitrage favouring imports into China over the past
week, LME copper stock cancellations in the Korean warehouse have now
risen to 16kt. We expect to see this result in a pick-up in Chinese imports,
with a potential near-term increase in visible Chinese stocks thus likely.
August’s Japanese shipments of aluminium fell to the lowest level since
January 2010 according to the latest data from the Japan Aluminium
Association. YoY August shipments fell 1.5% to 154,684t, down 9.5% from
~171kt in July. The association’s chairman noted that "we received betterthan-
expected orders for April-June and expected July-September orders
to undergo adjustments, but data suggests these adjustments might be
more severe than we previously thought". It was also noted that export
volumes to the rest of Asia have been disappointing in recent months.
We attended the CISA iron ore conference in Qingdao, where, similar to our
views, the consensus was for a near-term fall but not a collapse. Suppliers
also noted that there was still a lot of interest in acquiring cargos, even if
buyers were talking down the market at present, helped by a lack of supply of
Indian material. Interestingly, there was an obvious preference for lower grade
material. Two reasons were behind this - maximising productivity is not a
priority any more and lower grade cargos tend to come in smaller sizes that
are easier to finance.
Macquarie has been shortlisted in the Commodity Research House of the
Year category for the 2011 Commodity Business Awards. If you’d like to
vote for us, you can do so at http://www.commoditybusinessawards.com/.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Set for an ex-China steel destock
Feature article
As steel producers and consumers contemplate an uncertain macroeconomic
environment with slowing growth rates, the near-term focus looks set to be on
reducing working capital. In steel, current inventory levels are by no means
high by historical standards, but there does remain some room for destock ex-
China. With apparent demand driving steel price cycles, this is likely to keep
steel prices suppressed in the near term, while the desire to run lean also
means raw materials purchases will be the minimum required. Yet again,
China is set to lead any recovery, with a cyclical need to push inventories
higher into early 2012.
Latest news
Base metals gave up a fair degree of the previous day’s gains in Wednesday
LME trading, with the continued focus on the Eurozone again being the prime
driver. Fears that the German government may seek a renegotiation of
bailout agreements previously tabled, coupled with Portugal’s Prime Minister
confirming his country would be vulnerable should any other default drive a
further bout of liquidation. Copper dropped 4.6% on the day to $7,231/t, with
liquidation continuing post-market. All precious metals also fell, with silver
down 7.3% (simply benign compared to recent days) and WTI oil down 2.3%.
Tin showed the biggest fall on the day, down 5.7% despite the threat of an
imminent Indonesian export ban. In contrast, the physical market remains
tight, with Grade A tin premiums in the US holding steady at $650/t.
With the SHFE-LME arbitrage favouring imports into China over the past
week, LME copper stock cancellations in the Korean warehouse have now
risen to 16kt. We expect to see this result in a pick-up in Chinese imports,
with a potential near-term increase in visible Chinese stocks thus likely.
August’s Japanese shipments of aluminium fell to the lowest level since
January 2010 according to the latest data from the Japan Aluminium
Association. YoY August shipments fell 1.5% to 154,684t, down 9.5% from
~171kt in July. The association’s chairman noted that "we received betterthan-
expected orders for April-June and expected July-September orders
to undergo adjustments, but data suggests these adjustments might be
more severe than we previously thought". It was also noted that export
volumes to the rest of Asia have been disappointing in recent months.
We attended the CISA iron ore conference in Qingdao, where, similar to our
views, the consensus was for a near-term fall but not a collapse. Suppliers
also noted that there was still a lot of interest in acquiring cargos, even if
buyers were talking down the market at present, helped by a lack of supply of
Indian material. Interestingly, there was an obvious preference for lower grade
material. Two reasons were behind this - maximising productivity is not a
priority any more and lower grade cargos tend to come in smaller sizes that
are easier to finance.
Macquarie has been shortlisted in the Commodity Research House of the
Year category for the 2011 Commodity Business Awards. If you’d like to
vote for us, you can do so at http://www.commoditybusinessawards.com/.
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