Iron ore and steel: Fears of a property slowdown
Carsten Menke, Commodities Research Analyst, Julius Baer
Speculative traders in China’s iron ore and steel futures markets have been rushing for the exits on signs that the recent correction is extending. Prices are down another 4 per cent and 2.2 per cent since the end of last week, most likely due to concerns about looming demand weakness from the property sector. There has been constant news flow about property tightening in China as of late, intended to cool the overheated markets in or around the top-tier cities. While China’s property market enjoys a surprisingly strong recovery, lasting into this year, demand should fade over the coming years due to a slowdown in urbanisation. With around 40 per cent of steel demand related to property, this should lead to gradually declining steel production and weigh on the steel mills’ demand for iron ore. At the same time, iron ore supplies from the world’s two largest producers, Australia and Brazil, should continue to grow. Signs of oversupply have been emerging again as of late with Chinese port inventories rising to the highest levels since at least 2004. We believe that both iron ore and steel prices are still too high on current levels and remain at risk from profit-taking in the futures markets. That said, speculative futures positioning on the Chinese exchange is much more difficult to gauge as there are no statistics available. We remain cautious on iron ore while reiterating our three- and twelve-month price target of $75 and $60 per tonne.