Money Movement and Macro Market
The ferrous sector has started to correct after moves to control financial leverage of housing companies. This triggered some debt issues at Evergrande, one of the biggest housing companies, but the government also clarified and extend the deleveraging process to the 2023 (Bloomberg). Short-run stress finally reached an end on housing side. However infrastructure only contributed a small portion of steel consumption compared to the housing sector.
In addition, the combination of qualified foreign investment venues RQFII and QFII (China Daily), aims to absorb more foreign investment on equity markets, however most strategies are also against over-speculation and illegal financing on secondary markets.
Steel Sector
Ex-China furnaces started to recover production from July and August with imported steel decreasing significantly. However the second spike of the pandemic has spread some large European and East Asian cities. SHFE rebar Jan contract has corrected more than 8% during September, since both physical trading volume and apparent consumption is suggesting the construction season has passed and inventories potentially holding at 40%-50% higher level compared to the previous four-year average in Q4. Earlier in this June, construction steels were 46% higher than last four-year average, however September inventories were 55% higher than previous four-year average (Mysteel).
Northern construction steels have also started to flow in to eastern and southern market before winter comes.
Iron Ore
Iron ore daily pig iron production slightly moved lower from 2.5m tonnes to 2.49m tonnes (China National Bureau Statistics), Tangshan production curbs contributed this decrease. Military parades in the northern ports area before and during Golden Week will potentially slow down ships loading and road transportation (China Port Officials). Thus draws are expected lower and port inventories expected to increase. Port inventories have increased six out of seven weeks during August and September. Daily evacuation drop from 3.25 million tonnes to 3.13 million tonnes. (Steelhome and Mysteel)
The market has shifted its preference to mid-grade iron ore because both low grade and high grade have rebounded significantly. However mills indicated they are more interested in Brazilian low aluminum iron ores to reach acid-base balance in some furnaces. (China Northern Steel Mills)
Verdict: Iron ore is short-run neutral
Senior Researcher: Hao Pei