The ferrous complex is getting more and more volatile. I take this as a sign that we’re topping out given it appears to be a struggle between bulls and bears versus the former bulls only. Spot jumped. Paper went further overnight. Steel is lagging:
Yesterday’s steel PMI was soft with output booming but new orders falling 39. This index is very volatile so I don’t usually take fright until new orders are in the low 30s:
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More importantly for now, the softening steel conditions are setting up mills for losses as iron ore price upside outpaces the end product:
Gross profit margin for steel rebar in east China, which broke above 1,000 yuan ($157) per tonne in April, was just 40 yuan a tonne last week, according to CITIC Securities.
Zhuo Guiqiu, an analyst with Jinrui Capital, said some mills in eastern China were booking losses, while producers in the north are also struggling.
He did not specify which mills.
It is still the seasonal weak season around southern Chinese rains as well. The odds are therefore rising that steel mills will destock product and raw materials into EOFY with more price falls ahead.
That said, I still expect strong prices through July/Aug before a more serious accident in Sep/Oct.
Iron ore is highly seasonal and, oftentimes, changes in fundamentals only come to bear with the seasonal swings.