Insufficient driving force
On the one hand, from the perspective of steel mills’ resumption of production, iron ore still has support; on the other hand, from the perspective of price and basis, iron ore is slightly overvalued. Although there is still strong support for iron ore in the future, we need to be alert to the risk of a sharp decline.
Since the iron ore market started to rise on November 19 last year, the 2205 contract rebounded from a low of 512 yuan/ton to 717.5 yuan/ton, an increase of 40.14%. The current disk is trading sideways around 700 yuan/ton. From the current point of view, on the one hand, from the perspective of steel mills’ resumption of production, iron ore is still supported; on the other hand, from the perspective of price and basis, iron ore is slightly overvalued. Looking ahead, the author believes that although iron ore still has strong support for the time being, it is necessary to be alert to the risk of a sharp decline.
good release is over
The factors that drove the increase in iron ore in the early stage were the expected resumption of production by steel mills and the actual demand after the expected landing. The current expectations are gradually becoming reality. Data show that on December 24 last year, the steel mill inventory + sea drift inventory totaled 44,831,900 tons, an increase of 3.0216 million tons from the previous month; on December 31 last year, the steel mill inventory + sea drift inventory totaled 45,993,600 tons, month-on-month. An increase of 1,161,700 tons. The above data reflects that the low inventory strategy that the steel mill has maintained for half a year has begun to loosen, and the steel mill has begun to replenish the inventory. The rebound in Shugang and the destocking of trade inventories for the first time since September 2021 have also confirmed this.
In the case that the replenishment of the steel plant has been determined, we need to consider two issues: First, when will the replenishment of the steel plant end? Second, how long will it take for the resumption of production to reflect the recovery of molten iron? Regarding the first question, generally speaking, if the steel plant only replenishes the warehouse periodically, the duration will not exceed three weeks. If the demand continues to be good, steel mills will continue to increase inventory, which is reflected in the continuous upward movement of the center of the port volume, transaction volume, and steel mill inventory. At present, steel mills are more likely to replenish their warehouses in stages, mainly due to the following reasons: First, the southern region, which is able to resume production on a continuous basis, will soon usher in a seasonal reduction in capacity utilization in January; Due to the limited production in autumn and winter and the Winter Olympics, the capacity utilization rate is unlikely to increase significantly, and there is no condition for continuous resumption of production; thirdly, in East China, which is the main force for resumption of production, the capacity utilization rate is expected to rebound by 10%-15% , But if you look at it from a horizontal comparison, during the Spring Festival over the years, the scope of its resumption of production is still limited. Therefore, we tend to think that the recent replenishment and resumption of production are all phased.
Regarding the second question, it is expected that the molten iron will pick up in January, reaching the level of 2.05 million to 2.15 million tons per day. But since the resumption of production is phased, the rebound in molten iron output in the next few weeks will not have a long-term upward drive on the disk.
Relatively high valuation
First of all, from the perspective of valuation, the absolute price is already high relative to the fundamentals. In a horizontal comparison, the last wave started from the spot oversold, to the expected resumption of trading, to the expected replenishment of steel mills, and the rise and fall of molten iron output appeared in the market from late September to early October last year, when the disk price was high. Around 800 yuan/ton. At that time, the iron ore port inventory was 128.5722 million tons, and the average daily molten iron output was 2.2 million tons. The current inventory situation and demand situation are far worse than in late September last year. Even considering the resumption of production in January, it is expected that the molten iron production will not return to 2.2 million tons/day.
Secondly, from a statistical point of view, the basis of the 2205 contract is generally maintained at 70-80 yuan/ton in February and March of each year. The current basis of the 2205 contract is near 0, even if the spot price such as super powder has a 100 yuan/ton increase, considering the strong basis, the disk follow-up rate is also very limited. What’s more, the current mainstream port price of super special powder is generally around 470 yuan/ton, and there are no conditions for it to rise to 570 yuan/ton.
Finally, from the perspective of the linkage of black products, due to the weak support of steel prices, its decline will also lead to a downward adjustment of iron ore. At present, the demand for rebar in the off-season is fulfilled, and the apparent demand is poor. In terms of inventory, although social inventories are still depleting, the total inventories of steel mills have begun to increase, indicating poor demand for storage this winter. Due to the current high prices and lack of confidence in future demand, traders lack the willingness for winter storage. In the presence of downward pressure on steel, it is obvious that iron ore cannot be left alone.
Overall, the upward drive of iron ore in the market outlook is short-lived, while the downward drive has a more profound impact.