Daily iron ore price update (property pounding)

The ferrous complex was mixed on May 26, 2022:

Here’s the latest CISA data. Production is far too high still:

As are inventories (I’ve adapted a UBS chart):

More material on Chinese property today:

Steel prices in China have been falling as sluggish demand amid the slowing economy drives inventories at major mills to the highest level in two years.

The most-traded steel rebar futures contract on the Shanghai Futures Exchange, for October delivery, hit 4,427 yuan per tonne on Thursday, approaching the lowest level this year, sliding about 13% from the recent high seen in April. The most active October hot-rolled coil futures contract hit 4,632 yuan per tonne on the day, falling by more than 14% from the high in April.

The weak performance comes as steel inventories climb. According to data from the China Iron and Steel Association (CISA), steel product stockpiles at China’s major mills reached 19.98 million tonnes during the period of May 11 – 20, marking the highest level since early March 2020, surging 76.84% from the start of the year and rising 36.5% from the same period last year.

In early March 2020 when China was in a national lockdown to contain the initial Covid-19 outbreaks, stock inventories at China’s major mills hit 21.4 million tonnes.

Due to sluggish market demand, many steel mills chose to lower prices to boost sales, industry insiders say.

“The first half of this year’s second quarter has passed, but there is still no signs pointing to pickup steel demand, and the market doesn’t expect faster inventory reduction in the near future,” said Li Chunyang, analysts at Nanhua Futures.

Industry insiders believe that the major drag on steel demand is the persistent weakness in the real estate sector.

A manager at a Beijing-based steel trading company told Yuan Talks that average weekly consumption of steel rebar, which is widely used in construction projects, is currently around 3 million tonnes, about 14% lower than the weekly average of about 3.5 million tonnes in previous years.

The company’s clients are mainly real estate developers, but “they currently face difficulties in fundraising and sales and barely have any new projects,” said the person. “Even for existing projects, the Covid-19 outbreaks and containment measures have hurt mobility of workers and slowed project progress.”

In the rest of the year, property sales are expected to remain slow as the demand for first-homes have been front-loaded in past years and unlikely to pick up significantly in the next two years, said Li Xiaodong from Zhejiang Zhongtuo Supply Chain Management Co.,

By industries, about 39% of steel demand in China comes from the real estate sector, infrastructure about 16%, machinery manufacturing 18%, auto manufacturing about 8% and home appliance and shipbuilding about 2%, according to industry data.

As the downward pressure on the economy rises, China is expected to step up infrastructure investment. According to estimates by the China International Capital Corporation (CICC), the country’s infrastructure investment growth could reach 8% this year, much higher than 0.2% growth in 2021.

However, the incremental steel demand from the infrastructure industry won’t be enough to offset the loss in the real estate sector. “Even if steel demand from infrastructure grows by 10%, but if demand from the real estate sector maintains zero growth, the overall steel demand will remain weak,” said Xu Xiangchun, information director at commodity consultancy Mysteel.

However, iron ore remains correlated with the broader commodity complex so picking the decline is as much about ending that mania.

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