Iron ore prices are expected to remain low

Despite the fact that Goldman analysts point out the latest gloom high frequency economic data of China, and others at the bank noting that “iron ore fundamentals remain bleak” with prices hovering around a multi-year low of $93/tonne, a trader at the bank told clients on Tuesday that the metal the base could be primed for a “short covering rally.”

“The desk is getting a little more constructive over the next two weeks, but remains structurally bearish on the longer-term outlook,” Goldman commodities trader Mark Ma wrote in a weekly update on the iron ore and steel markets, which was outlined in a note distributed to clients by Thomas Evans.

Ma said: “We expect to see a short covering rally ahead of the long weekend and Golden Week after bears gained >10% in just one week,” adding: “Pre-holiday supply from factories steel would also add fuel to That said, we still think iron ore will remain structurally oversupplied over the long term, given ample supplies and weak demand from China. Market sentiment could not be more pessimistic. 9 out of 10 marketers are positioning, the CTA ratio is almost high.

He expects that any tightening in the base metal could “trigger a short 5% retracement from here” and that clients should “be ready to sell at the $95-100 level.”

Ma continued: “Macro bears, CTAs and discretionary money managers can’t wait for the peak demand season to pass. Iron Ore drops for 5 straight days to end week 12% less WoW”.

The trader summarizes the driving forces behind the iron ore market, including there is high supply and weak demand for steel in China and elsewhere:

1. The market outlook is moving past the seasonal recovery in demand and continues to trade the long-term structural surplus in Fe content resulting from robust IO supply and weak domestic steel demand.
2. Pig iron production fell to 2.2 million tpd and is gradually increasing due to marginal margin expansion due to low coke and IO prices. There is more scope for pig iron production to rise sequentially from here to 2.3 mtpd if margin could hold or improve further.
3. Port inventory remains high due to strong shipments from Brazil and the lack of production cuts from mining juniors. Arb import remains slightly negative due to overstocking. 2/3 of the 150 million+ stock is held by traders, leaving very little room for speculation by trading houses.
4. Indexing tonnage is well supplied in both the port and sea markets. MNPJ premium all sit in negative territory. The SGX curve moved into contango from September to December as a result of the weak premium market and weak prices.
5. Not only premium MNPJ but also LP and 65/62 are sold. LP returns to 14c/dmtu after traders puke and MOC bids lower. 65/62 is compressed to the lowest level of the year as mills continuously switch from consuming higher quality IOs to consuming lower quality I/s to reduce productivity.
6. Steel mills are taking this slump as a good opportunity to restock ahead of the long weekend and the upcoming golden week in early October. Miners and traders are also eager to sell in pre-holiday replenishment flows, and thus trading volumes increase at lower prices.

China’s hot metal output fell to a seasonal low amid high port inventory levels.

Turning to the steel market, the trader said prices hit a “7-year low as demand for distressed properties continues and infrastructure demand slows despite resilient steel export momentum”.

In a separate note, a team of Goldman analysts led by Aurelia Waltham and Daan Struyven said the “fundamental outlook for iron ore remains bleak” as prices traded at a two-year low.

This was the most amazing chart in the analyst report: Just 1% of steel mills are profitable in the second economy in the world. As profitability collapses, hot metal production declines.

Earlier this month, Goldman’s Rich Privorotsky told clients: “Iron ore is down to 90, China will continue to struggle, and commodities as a whole, I think, reflect the downgrading of growth expectations in geography.”

A note released by the China Iron and Steel Association to industry insiders also noted, “There will be some recovery in steel demand through September and October, which is favorable for the steel market.”

“However, we need to be careful about the impulse to restart production,” the association said, adding that the risk of too much production of steelmaking material could diminish “any improvement in the situation will end up being a flash in the pan “.

China’s steel industry has been under pressure amid a severe downturn in the housing market and a weak economic recovery.

Last month, Baowu Steel Group Chairman Hu Wangming ADVISED that economic conditions in the world’s second-largest economy felt like a “harsh winter.”

As the world’s largest steelmaker, Chairman Baowu Steel said the steel industry’s decline could be “longer, colder and harder to bear than expected”, potentially mirroring the severe recessions of 2008 and 2015.

Another team of Goldman analysts, led by Yuting Yang and Lisheng Wang, published high-frequency economic indicators, including consumption and mobility; production and investment; other macro activities, and markets and politics, that disclosure there was no imminent recovery in China.

By Zerohedge.com

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