Market Commentary
Iron ore futures plunged below $180 for the first time since June as China steps up measures to clean up the steel sector, stoking fears among investors that Chinese demand will wane. Authorities had been attempting to cap steel output below last year’s record, but it had proved unsuccessful so far, with production climbing 12% in the first half of the year, compared to a year ago. China had stepped up measures in the past fortnight to clean up one of its dirtiest industries. Steel mills from 12 provinces, as well as those in Shanghai and Chongqing municipality, were instructed by Chinese authorities to slash crude steel to below 2020 levels. Furthermore, China also raised steel export tariffs on Thursday as it seeks to achieve the twin goals of capping capping domestic production and taming the surging raw material prices that have fanned concerns about inflation. On top of that, China Iron and Steel Association (CISA) also vowed on Thursday to accelerate development of domestic iron ore source and the construction of overseas iron mines invested by Chinese companies in order to secure the country’s iron and steel supply during the 14th Five-Year Plan 2021-2025. “We don’t expect China’s crude steel output to contract to that extent, but China’s steel production is now facing more headwinds than slowing steel demand.”Shagang Group, the world’s fourth largest steel mill, said this week that it will be curtailing production and overseas sales to comply with government efforts to cut emissions. Iron ore stockpiles across 45 major ports fell by 343,400 metric tonnes this week to 128.13 million tonnes, signaling weaker demand. Meanwhile, Chinese mills’ steel stocks continue to dwindle for the fourth consecutive, down about 1% to 6.1 million metric tonnes as production slowed in face of broader production cuts across provinces. Chinese traders are thought to be actively selling contract cargoes to reduce stockpiles, but steel mills have been reluctant to hold more iron ore stocks as they expect more production curbs ahead.
Iron ore futures have plunged nearly 20% in the fortnight, but onshore rebar futures have remained strong, gaining about 7% over the same period. Futures in Singapore took a heavy beating as it sank below $180 for the first time since 1st June. Aug was seen trading down from 180.00 to 177.4 while Sep also traded down from 177 to 175.8. Spreads were once again all over the place, with front month spreads showing a bit of resilient as aggressive onshore buyers keeping them high. Aug/Sep traded 2.95 and 3.1. Cal 22/23 was heard trading at 32.5 while Q4/Cal22 traded at 24.35. Jan/Q4 also traded at 8.00.
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