Iron ore and steel: Back towards reality
Carsten Menke, Commodity Research, Julius Baer
The early-year rally in iron ore and steel prices has been very puzzling to us as it lacked signs of tightening market balances. Iron ore inventories in Chinese ports rose to record levels while steel inventories normalised. Nevertheless, sentiment in the futures markets was extremely bullish and speculative buying the most likely reason behind the rally. Now, prices have come back towards reality. Iron ore lost 8.5 per cent yesterday and more than 16 per cent during the week, while steel was down almost 10%. We believe speculative traders have been getting increasingly concerned about looming steel demand weakness from the property sector amid constant news flow about tightening regulation. With the seasonal peak in Chinese steel production approaching and steel mill margins under pressure, iron ore demand is set to soften over the coming months. Meanwhile, iron ore supplies are rising. As reported this morning, Chinese imports reached record levels in March as low-cost mine production from Australia and Brazil is expanding. We stick to our cautious view on both iron ore and steel.
Sentiment in China’s iron ore and steel markets continues to cool amid increasing concerns about looming steel demand weakness from the property sector. With the seasonal peak in steel production approaching, iron ore demand is set to soften over the coming month while supplies are rising. We stick to our cautious view.