Contrarian investors take note, particularly if you like to dabble in commodity futures or mining stocks: Chinese steel market participants haven’t been this optimistic on the outlook for demand in over five years.
According to researchers at Macquarie Bank, sentiment towards the outlook for the steel market is at “extremely elevated levels” right now, fueled by anticipation of strong steel demand during the upcoming the spring construction season.
“Our survey respondents are the most bullish they’ve been in over five years,” the bank wrote in a report this week. “This bullishness is clearly reflected in recent price moves in steel and iron ore.”
This chart from Macquarie shows the “extremely elevated” levels of sentiment from Chinese mills, steel and iron ore traders.
Clearly, almost everyone is optimistic over the prospects for the next three months, no doubt contributing to some of the stonking gains in iron ore and steel billet and rebar prices since the end of Lunar New Year holidays.
“The bullish sentiment is reflecting expectations for post Chinese New Year demand rather than recent orders,” Macquarie says, noting “orders have been more subdued as is to be expected around the Chinese New Year holiday.”
It has also been helped by a lift in margins at steel mills, aided by a lift in steel prices as input costs, primarily due to weaker coking coal prices, fell.
In anticipation of a further pickup in demand, Macquarie says mills have indicated that they intend to lift iron ore purchases even further in the weeks ahead, continuing the build seen in the latter parts of last year and again in early 2017.
“Steel mills have clearly built iron ore inventory in anticipation of lifting steel output in the months ahead,” the bank says.
“Moreover, despite already-high inventory levels, mills in our survey report that they plan to raise purchases further over the next month, meaning iron ore prices may still be supported in the very near term.”
Everyone appears to be bullish towards the medium-term outlook for steel demand, and that’s been reflected in the recent price action across the sector recently.
However, as many contrarians are almost certainly pondering, is the bullish sentiment a sign that the top is close or in?
While Macquarie says the answer will be determined by whether new orders can come through strongly enough not to disappoint expectations, it thinks that sentiment has now become “too elevated”, particularly for iron ore.
“We believe that with inventory at extremely elevated levels at mills and record highs at ports, it won’t take much of a turn in sentiment for prices to move sharply lower,” it says.
Perhaps coincidentally, the spot price for benchmark 62% iron ore fines suffered its largest one-day percentage decline in six weeks on Thursday, according to Metal Bulletin, with Chinese futures now plunging by over 4% in early trade on Friday.
That followed the revelation that the Chinese government was in the process of drawing up plans for a nationwide property tax, following pilot programs that had been introduced in select cities back in 2011.
Residential construction is one of the largest sources of commodities demand in China, with any potential slowdown in activity likely to create a negative headwind for bulk and base metals prices.