Reuters has a couple of pieces on iron ore this afternoon. The first has some daily texture on today’s more positive derivative action:
“I don’t see this rebound as a trend. I think people who are short on steel futures will continue to be short,” said Helen Lau, mining analyst at UOB-Kay Hian Scurities in Hong Kong.
“There’s too much supply and traders want to transfer the inventory risk to the end-user that’s why they’re unloading at lower prices,” said Lau.
“The market is still generally well offered,” said a trader in Singapore. “There’s a lot of available supply and some of the mills are opting for cargoes at the ports which are cheaper.”
The second piece, by commentator Clyde Russell, observes that:
Iron ore swaps traded in Singapore are suggesting that the worst may be over for the steelmaking ingredient, but futures in the Chinese city of Dalian point to further price weakness.
Both can’t be correct, but the divergence of the two contracts does raise the question as to which group of investors has a more accurate gauge on the current balance of risks.
The Singapore Exchange (SGX) iron ore swaps <0#SGXIOS:> tend to be favoured by miners and traders, while the Dalian Commodity Exchange (DCE) futures <0#DCIO:> are mainly used by Chinese steel mills and domestic investors.
…the wave of supply from new mines and expansions is starting to hit, with an additional 240 million tonnes of new supply expected to be brought on line this year and next.
This makes the bearish view presented by the DCE futures curve the more likely scenario on a 12-month view.
However, the SGX curve suggests price stability for the next few months, which is possible if China’s seasonal steel demand does pick up for summer and the PMIs confirm a manufacturing recovery is underway.
Fair enough, but I will observe, wryly, that both could be wrong and that neither curve has proven very accurate over the journey. Both have traded too close to the underlying spot price and have, therefore, failed to correctly forecast futures prices, especially (but not exclusively) on the downside. For instance, in May last year the 12 month swap averaged$110 yet the price is trading at an average of $102 with most of the month passed.
I haven’t calculated that across the last few years but my sense is that the futures curve has proven to be more often than not too bullish despite virtual non-stop backwardation.
