CBA: There is a real chance iron ore prices could rebound in the short-term

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Steel inventories in China are well below normal and steel mill margins are increasing again.

And that means that the recent rebound in iron ore spot markets may have further to run, says Vivek Dhar, mining and energy commodities analyst at Commonwealth Bank.

He explains:

Chinese steel rebar stockpiles are now nearly 30% below the historic average. Together with a rebound in steel mill margins, there is a real chance that iron ore prices could rebound in the short term. We would closely watch for a pick-up in steel output rates in China to confirm stronger iron ore demand. Steel product output in China has edged lower from January to April, providing some room for production to retrace higher. Some of this contraction can be attributed to weaker external demand, where tariffs have weighed on Chinese steel imports. It is worth noting that China’s crude steel output, which is further upstream to steel products, has diverged significantly. Crude steel output has expanded nearly 5% this year, well above sustainable levels and suggests imminent oversupply threats. Despite this risk, we believe there is enough scope for iron ore prices to rebound modestly.

This chart from Dhar shows the gross production margins for steel mills operating in China over the past few years.

Source: CBA

As a result of recent weakness in iron ore and coking coal prices, along with a rebound in steel prices, margins have increased noticeably in recent weeks.

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