The ferrous complex was bizarre on March 31, 2002:
The unprecedented dislocation between spot and futures continues with the latter much higher than the former. I can only surmise that this is because futures are overbid by speculators while the underlying market is saturated with supply.
Steel demand remains terrible. The China Steel PMI was poor:
Judging from the steel industry PMI surveyed and released by the China Federation of Iron and Steel Logistics Professional Committee, in March 2022, it was 44.3%, a month-on-month decrease of 3.0 percentage points, and the growth rate of the steel industry declined. Judging from the changes in the sub-indexes, in March, the spread of the domestic epidemic had a more obvious impact on the steel industry, the production of steel plants declined, the overall market demand tightened, the pressure on the logistics and transportation of raw materials and finished products increased, and the market price rose. However, the steel industry in the future has the basis for a stable recovery. It is expected that in April, the release of market demand will be accelerated, and the production of steel mills will tend to recover, but the cost pressure may continue, driving steel prices to rise slightly.
Figure 1 Changes in PMI of the steel industry since 2018
In March 2022 , the domestic epidemic has spread, affecting many cities, and has a relatively large impact on the supply chain of the steel industry. In terms of index changes, the overall production of steel mills has declined due to the impact of the epidemic. In the first half of the month, in order to ensure the smooth progress of the Winter Paralympics and the Two Sessions, the production of steel mills faced environmental protection and production restrictions, but production was relatively stable in terms of output. The spread of the epidemic in many places in the second half of the month has a great impact on the supply chain of the steel industry. First, the epidemic in some areas has affected the employment of personnel, and the operation of steel plants has been limited; Directly blocked, resulting in a slowdown in steel production. The production volume index in March was 45.4%, down 3.8 percentage points from the previous month. According to statistics from China Iron and Steel Association, as of mid-March, the national daily output of crude steel was 2.6207 million tons, a decrease of 2.11% from January to February; the daily output of pig iron was 2.1358 million tons, a decrease of 4.63% from January to February; the daily output of steel 3.316 million tons, down 0.54% from January to February. Due to the difficulty in transportation of raw materials, steel mills increased the consumption of raw materials in stock during the production process, and the raw material inventory index fell by 4.5 percentage points month-on-month to 38.2%.
Figure 2 Changes in the steel production index since 2018
The demand side is also more obviously affected by the epidemic. The epidemic has multiple impacts on demand. First, it directly affects the start of construction by steel users; second, it affects the timeliness and costs of logistics links, thereby restraining demand to a certain extent. Combined, the market demand has tightened. According to the Shanghai Zhuogang Chain, the start of construction nationwide in March was average, and although there were many new projects overall, due to the impact of funds and epidemic control in some areas, the release of demand was limited. At the same time, the performance of the real estate industry is still not good, and the bond payment window has tightened funds, providing limited support for the commodity market in the short term, and limiting the demand in the steel market to a certain extent. In addition, for the commodity market, the impact of monetary policy adjustment on market expectations is relatively obvious. The increase in the scale of social financing decreased in February, which has an impact on corporate capital expectations. In particular, infrastructure and real estate projects are facing financial constraints after the beginning of the year, which has formed certain obstacles to the procurement of raw materials and delayed the release of demand in the commodity market. Judging from the monitored purchase data of terminal wire and snails in the Shanghai stock market, the average daily purchase volume of terminals in March rebounded by 190% month-on-month, but there was a surge and decline, indicating that there is a certain pressure on terminal demand.
Figure 3 Changes in the new steel order index since 2018
Figure 4 Changes in the monitoring data of the weekly purchase volume of terminal wire and snails in the Shanghai stock market since 2018
Steel demand is terrible. We are also entering a seasonally weak period for iron ore as monsoon disruptions pass for supply and steel mills ratchet back after the Q1 restock. On top of that, China is slumping into its version of a recession under pressure from property and OMICRON, and both Europe and the US are about to follow.
The only reason I am not prepared to declare that big price falls are looming is that the fog over the market from Ukraine and Wall Street is so thick that we can’t see anything clearly.
Nonetheless, noting that caveat, the base case has to be that iron ore price weakness is ahead.