The ferrous complex cooled off Friday April 30, 2021 with spot down, paper down more but steel firm:
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We are into the May seasonal price falls now. Expect a 10% correction or so before we rebound through later June for a few months.
However, the larger cyclical slowdown is also coming. Last week’s PMIs gave us a glimpse, via Capital Economics:
The latest surveys suggest that growth edged down this month. Supply-side disruptions appear mostly to blame for a slower rise in manufacturing output. But there are also signs of a demand-led slowdown in construction and services. Activity is still robust and is likely to remain so in the near-term, but sequential growth will probably continue to cool.
The official manufacturing PMI dropped back from 51.9 in March to 51.1 this month (the Bloomberg consensus was 51.8 and our forecast was 52.0). Meanwhile, the Caixin manufacturing PMI rose from 50.6 to 51.9 (Bloomberg 50.9, CE 51.0).
Averaged across both surveys, the new orders component held steady, but the output component dropped from 52.8 to 52.4, hinting at slower growth in industry. The main culprit appears to be supply chain problems. Respondents to both surveys reported shortages in input materials and logistical delays. Delivery times lengthened, inventories fell and the component measuring backlogs of work increased. These supply-side disruptions are stoking price pressures. Averaged across both PMIs, the price indices edged down slightly but still point to a large m/m rise in producer prices.
The Caixin services PMI won’t be released until next Thursday but the official non-manufacturing PMI was published today and declined from 56.3 to 54.9 (Bloomberg 56.1, CE 56.5). The services index decreased from 55.2 to 54.4, suggesting that the rebound in services activity following the relaxation of virus containment measures in March began to slow this month. Meanwhile, the construction index dropped back sharply from 62.3 to 57.4, well below its five-year average of 59.6. This likely reflects tighter regulation of real estate developer financing and reduced fiscal support. All told, the official composite PMI fell from 55.3 to 53.8 – still strong but a bit softer than during most of the past year.
The latest survey data is consistent with our view that, with the economy already above its pre-virus trend and the policy stance less supportive, growth momentum will wane this year. The key remaining prop is the export sector but demand for Chinese consumer goods is likely to fall back over the coming quarters as vaccine rollouts allow global consumption patterns to return closer to normal.
Quite right. With iron ore supply also normalising, I retain my “sell the iron ore rallies” call.