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China Commodity Call
Steel slips into oversupply
After months of very benign price movements over 2011, China’s steel and
iron ore prices have lurched downward in recent weeks, and the declines
seem to be gathering pace. Here we run through our view of what is driving
the market down and point to what investors should be looking for to signal
the end of the rout.
Steel appears to be in oversupply
Since mid-September, steel prices – and rebar prices in particular – have
fallen sharply. The market appears to have moved quickly into oversupply,
and inventory is rising rapidly at traders and at mills.
Most of this oversupply appears to be in long products, as flat product
production had already pulled back over July and August, while rebar
production remained robust.
Margins are closing, production needs to be cut
The fall in rebar prices has served to close the margins that had blown to
near-record levels earlier in the year. Rebar inventory has been rising at the
traders, and while unseasonal stock build is worrying, of greater concern is
the rise in mills’ own inventory of finished steel. This inventory build is a clear
sign that production needs to be cut.
As yet, there are no clear indications that production is being cut. Highfrequency
CISA data suggests output was actually up modestly at the start of
October.
Iron ore inventory has fallen heavily
While it may not be clear that mills have cut production, it is clear that mills
have been cutting iron ore purchases. Pricing for iron ore has become
increasingly weak over the last few weeks, but this has coincided with a
plunge in the level of iron ore inventory being held by the steel mills.
For most of 2011 mills have kept iron ore inventory floating between 33 and
28 days of cover (inventory refers to material held in the stockyard, in transit
and at port), with prices rebounding on two occasions when inventory hit the
lower bound of the range. However, the latest data point (for October 17)
suggests inventory has fallen to 25 days of cover, without there being any
sign of a rebound in the price (see Figure 11).
Probably more downside ahead, but a risk the market gets
squeezed
We think it will be hard to see a strong turnaround in the iron ore price until
mills have destocked the steel they are holding on site, and for this to happen,
we will need to see production pulling back. However, we do think there is a
real risk of apparent consumption of both steel and steel-making raw
materials undershooting real demand quite significantly while this destocking
is going on. This has the potential to cause a snap-back in pricing of both upand
down-stream products.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
China Commodity Call
Steel slips into oversupply
After months of very benign price movements over 2011, China’s steel and
iron ore prices have lurched downward in recent weeks, and the declines
seem to be gathering pace. Here we run through our view of what is driving
the market down and point to what investors should be looking for to signal
the end of the rout.
Steel appears to be in oversupply
Since mid-September, steel prices – and rebar prices in particular – have
fallen sharply. The market appears to have moved quickly into oversupply,
and inventory is rising rapidly at traders and at mills.
Most of this oversupply appears to be in long products, as flat product
production had already pulled back over July and August, while rebar
production remained robust.
Margins are closing, production needs to be cut
The fall in rebar prices has served to close the margins that had blown to
near-record levels earlier in the year. Rebar inventory has been rising at the
traders, and while unseasonal stock build is worrying, of greater concern is
the rise in mills’ own inventory of finished steel. This inventory build is a clear
sign that production needs to be cut.
As yet, there are no clear indications that production is being cut. Highfrequency
CISA data suggests output was actually up modestly at the start of
October.
Iron ore inventory has fallen heavily
While it may not be clear that mills have cut production, it is clear that mills
have been cutting iron ore purchases. Pricing for iron ore has become
increasingly weak over the last few weeks, but this has coincided with a
plunge in the level of iron ore inventory being held by the steel mills.
For most of 2011 mills have kept iron ore inventory floating between 33 and
28 days of cover (inventory refers to material held in the stockyard, in transit
and at port), with prices rebounding on two occasions when inventory hit the
lower bound of the range. However, the latest data point (for October 17)
suggests inventory has fallen to 25 days of cover, without there being any
sign of a rebound in the price (see Figure 11).
Probably more downside ahead, but a risk the market gets
squeezed
We think it will be hard to see a strong turnaround in the iron ore price until
mills have destocked the steel they are holding on site, and for this to happen,
we will need to see production pulling back. However, we do think there is a
real risk of apparent consumption of both steel and steel-making raw
materials undershooting real demand quite significantly while this destocking
is going on. This has the potential to cause a snap-back in pricing of both upand
down-stream products.
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