Chinese iron ore port inventories may rise to 150 mnt in Q2CY24
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Overview:
Considering the current seasonal high iron ore supply (Australian shipments have resumed this week), the turning point of iron ore destocking seems to be getting further and further away. As we mentioned before, the necessary condition for iron ore ports to begin destocking is that the production of molten iron needs to return to over 2.35 million tons. If the current production of molten iron continues for more than 2 weeks, the market is concerned about the port inventory scale of 150 million tons in the second quarter of this year (as of this week, this data has reached 141 million tons).
From a global perspective, although the annual and global balance sheets will not bear more than expected pressure due to the recovery of supply from Ukraine and Iran, iron ore is still difficult to call an excess variety. However, in the first half of the year, during the time window of weak domestic demand and the lack of elasticity in external demand, phased supply pressure is enough to pose a threat to the fundamentals of iron ore. Therefore, standing on the futures position with a short trading duration, we still insist that ferrous commodities, including iron ore may become a more stressful variety in the short term.
Considering the perspective of industrial profit, the sentiment premium of various varieties given by the improvement of market expectations since the fourth quarter of last year has been largely squeezed out. The expectation gap formed by the failure of demand in the peak season is significantly smaller than in previous years, and the power gap between the long and short sides is not significant. It is recommended that short orders in the early stage reduce their positions and stop profits appropriately below the recommended lower margin of 850 yuan/ton.
Macro:
In China, two sessions were held last week. Some of the core policy goals are basically close to the rumors before. The GDP target of 5%, the deficit rate of 3%, the special debt of 3.9 trillion yuan and the special treasury bond of 1 trillion yuan are not low in general, but the strength of supporting policies seems to be slightly lower than the market expectations. The current state of the economy is still weak and stable, with a very flat trend compared to the previous quarter. Therefore, if we maintain the current momentum of the economy compared to the previous quarter, it will be difficult to achieve a 5% target for the whole year. After seeing the data for the first quarter, this may be more clear.
Since resuming work, domestic high-frequency data shows that the economy has remained relatively flat compared to the previous month. The performance of the real estate sector is relatively weak, with second-hand houses closing better than new houses, partly due to concerns about unfinished projects. More importantly, after more than two years of significant decline, second-hand houses have gradually gained an advantage in terms of cost-effectiveness compared to new houses. The key to stabilizing current housing prices is also to see if second-hand housing can be stabilized. The transaction of second-hand housing is not a big problem, and the key is whether the supply will reach a new high. If the marginal supply reaches its peak, the price is expected to stabilize around the middle of this year. However, if the supply of second-hand housing continues to reach a new high in the future, the downward pressure on overall housing prices will continue.
In order to achieve the 5% target, it is obvious that we cannot rely solely on the recovery of external demand to drive exports. It is highly likely that domestic demand policies will continue to be strengthened in the future. However, the next important policy node may not be until the Politburo meeting at the end of April. If we want to see stronger policies, whether it is for the real estate sector, the fiscal sector, or other emerging industries, it is highly likely that they will not be available until then.
Prior to this, we need to face the reality of weak demand during the peak season, as well as a policy environment with lower than expected intensity. The credit data and economic data for January and February next week are likely to perform weakly, which may further strengthen the weaker than expected trading during the peak season. As prices weaken and speculative demand declines, it will also further strengthen the weak state of demand. There will be some pressure on the data that may be seen throughout March-April.
Fundamentals:
The overall price performance of iron ore this week is still weak, but the speed of decline has slowed down significantly. Under a poor demand recovery, the market has always maintained the mentality of suppressing steel mill profits.
Since January, the adjusted profits of steel mills have indeed been in the expansion channel, but this stage spans the Spring Festival, and profits cannot be realized due to poor downstream purchase order. Some steel mills have reported no improvement in their actual financial situation, and several steel mills have issued "price support statements" within the week to ask steel mills not to decrease sell prices. Steel mills in Yunnan, Guizhou, and other regions with relatively high costs have started to cooperate in reducing production. The direct fallout is that there has been a rare phenomenon of iron production not increasing but decreasing after the holiday, and it seems difficult to see a sustained recovery in the short term.
Considering the current seasonal high iron ore supply (Australian shipments have resumed this week), the turning point of iron ore destocking seems to be getting further and further away. As we mentioned before, the necessary condition for iron ore ports to begin destocking is that the production of molten iron needs to return to over 2.35 million tons. If the current production of molten iron continues for more than 2 weeks, the market is concerned about the port inventory scale of 150 million tons in the second quarter of this year (as of this week, this data has reached 141 million tons).
From a global perspective, although the annual and global balance sheets will not bear more than expected pressure due to the recovery of supply from Ukraine and Iran, iron ore is still difficult to call an excess variety. However, in the first half of the year, during the time window of weak domestic demand and the lack of elasticity in external demand, phased supply pressure is enough to pose a threat to the fundamentals of iron ore. Therefore, standing on the futures position with a short trading duration, we still insist that ferrous commodities, including iron ore may become a more stressful variety in the short term.
Considering the perspective of industrial profit, the sentiment premium of various varieties given by the improvement of market expectations since the fourth quarter of last year has been largely squeezed out. The expectation gap formed by the failure of demand in the peak season is significantly smaller than in previous years, and the power gap between the long and short sides is not significant. It is recommended that short orders in the early stage reduce their positions and stop profits appropriately below the recommended lower margin of 850 yuan/ton.
Written by: Mengtian, Jiang
Note: This article has been written in accordance with an article exchange agreement between Horizon insights and BigMint.