Treasure Chest | Jun 23 2015
By Greg Peel
As of yesterday, the spot iron ore price was continuing its drift back from a recent high over US$65/t to US$60.50/t. The rally from the low had represented a price rebound of nearly 40% since April.
Yet over the same period, Chinese steel prices have fallen 18%, note ANZ’s commodity analysts.
Iron ore’s rebound from its lows, aside from any “oversold” calls amongst speculators, has been driven by a combination of minor supply disruptions and stronger seasonal demand, ANZ contends. The gains have come despite moves higher for the US dollar, which suggests a rapid fall in Chinese inventories has been influential. Iron ore held at Chinese ports has fallen 20% year to date to a seven-month low.
Stocks still appear to be declining, but ANZ believes the trend is about to reverse.
Chinese house prices appear now to be stabilising after a long period of falls, and even picking up in some regions, ANZ notes. However construction activity remains muted. Additional new floor space is down 16% year on year over the period January to May, compared to a fall of 10% for the year 2014. Housing inventory has built up strongly over the past 18 months and with the northern summer approaching, construction activity is soon to shut down for a break.
Steel demand should thus remain weak for the next few months, ANZ suggests.
The rebound in the iron ore price even as steel prices have fallen has introduced another problem for steelmakers. Margins have turned negative. Beijing’s stimulus measures are therefore unlikely alone to provide any great incentive to grow steel production, ANZ assumes, unless there happens to be a sudden pick-up in construction.
Hence risk is to the downside for the iron ore price. Exacerbating this risk is derivatives contracts held on the Singapore Exchange. As the iron ore price rebounded off its lows and rallied 40%, open positions on the exchange increased, implying a build-up of speculative interest. However, as prices are now falling back, the open interest appears to be rolling over.
The risk is not just profit-taking amongst those who have successfully ridden the rally, but stop-loss selling from those who got in late. This could exaggerate any iron ore price weakness ahead, ANZ warns.
ANZ has initiated a short trade on the Singapore Exchange targeting a price of US$53/t over the next three months.
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