Mixed signals from the bulks

the news that China is not building apartments on the moon did not prevent a solid rally in iron ore spot and 12 month futures overnight. Both up almost 2% (white and yellow lines):

However, as you can see, nobody actually in the Chinese steel markets seems to have gotten the AFR memo about imminent moon construction and Shanghai rebar has continued to fall. As has thermal coal, though its weakness is certainly related in some fashion to market specific issues such as rising supply. This should inject some caution into thoughts of whether or not the iron ore rally is sustainable.

 

 

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. After all the spread between the falling Shanghai rebar price and stablising iron price is now at its widest ever:

    what is the basis for that statement? Your chart has two different scales — one for the green line and one for the others.

    What definition of the spread are you using when you make that claim?

    • Thanks for pointing that out. I actually published the wrong version, which was based on a mistaken chart. I double checked and found the spread was not terribly remarkable but somehow published the earlier version – whoops!

      • what might be interesting — if you can do this with your Bloomberg — is plot the Shanghai rebar price divided by the spot iron ore price. This would be a back of the envelope guide to one input cost as a % of finished product revenue.

        and if you can do that then maybe similar with coking coal.

  2. As I understand it, China is trying to move towards increased domestic consumption, so the new stimulus package should look quite different to the last one.

    • Depends which rumour you listen to. Seems rumours are all that the market listens to lately, facts be damned!

    • so the new stimulus package should look quite different to the last one.

      Lets hope so Peter. Despite what the MineBots might tell you, the primary responsibility of the Chinese authorities is to the raise living standards of the Chinese people, not bid up commodity prices to make Aussie miners rich.

      China needs to raise incomes, stimulate domestic demand, and transition to a consumer economy, not build stuff it doesn’t need with Aussie iron ore.

      • Lorax – I expect the stimulus to help mining, but not to the same extent as last time, and that’s a good thing IMHO.

        What do you need the AUD to fall to – will sub 0.90 be enough?

  3. One view:

    “So far spot iron ore is down 5.7 percent in 2012 to $130.50 a tonne, while copper is actually up 1.7 percent to about $7,740 a tonne.

    To my mind this makes iron ore closer to the bottom of its price range than copper, especially since Chinese inventories aren’t as elevated as those for copper, and while imports may be sluggish for the next few months, they have more scope to recover in the second half.”

    http://af.reuters.com/article/commoditiesNews/idAFL4E8GS1QT20120528?pageNumber=1&virtualBrandChannel=0&sp=true

    • I have steered clear of copper because I just keep getting it (price) wrong. Copper hasn’t really been trading on fundamentals for 3 years so IMO hard to figure out the direction. Its a traders market.

      Longer term (5+ years) it should do better than iron ore because there just isn’t that much good reserves around (relative to the capacity of iron ore to increase volumes by large amounts).