Credit Suisse thinks the shellacking iron ore prices have copped over the past couple of weeks is about to come to an end, suggesting that the recent dip has been driven by speculators baling from their long positions rather than fundamentals.
“We expect iron ore will recover if physical steel prices remain firm and steel margins stay wide,” says Matthew Hope, research analyst at the bank.
“Steel mills stopped buying iron ore when prices started falling and they took fright. But if strong cash margins remain on offer, they will soon regain confidence and start buying ore again.”
As other analysts have pointed out, Hope says the plunge in iron ore prices followed a similar move in steel products that was sparked by China’s National Development and Reform Commission (NDRC) talking down prior strength in steel prices earlier this month.
“The NDRC scored an early success in its attempt to talk down the steel price on 16 March, with steel futures leading the ferrous complex down with a 13% drop,” he says.
“The NDRC is a powerful agency and it is not wise to take the opposing view, so the speculators are probably clearing out.
“Falling futures caused uncertainty for steel mills and they stopped buying iron ore.”
This chart from Credit Suisse shows the price movements in Chinese rebar spot and futures prices, and for benchmark 62% iron ore fines, over the past 15 months.
Clearly rebar futures fell hard, dragging spot iron ore along for the ride. On the other hand, spot rebar prices held firm.
While the NDRC managed to spook the speculators, Hope thinks it will not be able to dictate strong market fundamentals.
“Our take on the events are that speculators have abandoned futures for the moment, and scared steel mills, but demand will roll on, as construction season as begun and companies need steel,” he says.
“Real demand remains and that is a force more powerful than the NDRC, as we saw in last year’s coal price debacle.”
Hope says that while Chinese steel futures tanked, physical steel prices fell by a far more modest 3%, underling the role that speculators have played in the recent market selloff.
Should physical steel prices remain elevated, Hope says that mills will likely lift iron ore purchases.
“We suspect that they will recover under the force of demand as April approaches and construction winds up. Steel mills will watch pricing, but if physical prices and steel prices stay high, they will soon return to start buying iron ore again.”
He also dismisses concerns over burgeoning Chinese iron ore port inventories, a factors some have cited in contributing to the recent price plunge.
“The market remains fixated by 132 million tonnes of port stocks, but the Mysteel’s latest survey indicates steel mills stocks — including port holdings — are at normal levels in days of consumption, and so do port stocks when measured as days on import cover,” says Hope.