Production down 8% is the equivalent of 140mt less iron ore needed. The latest recycling shutdowns is roughly 40-50mt so there is an abundance of iron ore supply versus last year.
Yesterday’s Steel PMI was just as bad:
Judging from the steel industry PMI surveyed and released by the China Federation of Steel and Logistics Professional Committee, April 2022 was 40.5%, a month-on-month decrease of 3.8 percentage points, declining for 3 consecutive months, and the downward pressure on the steel industry has increased. Judging from the changes in sub-indexes, in April, the impact of the epidemic on the steel industry continued, involving all links in the industrial chain, the overall decline in demand, the tightening of production in steel mills, the rise in raw material prices, and the downturn in steel prices. It is expected that in May, as the epidemic prevention and control measures continue to be consolidated, the impact of the epidemic on the steel industry chain will gradually weaken, the previously suppressed market demand may be released faster, the production of steel plants will tend to recover, the cost pressure is expected to ease, and steel prices will rise steadily. .
Figure 1 Changes in PMI of the steel industry since 2018
In April , the spread of the domestic epidemic was still the primary factor affecting the steel industry chain. On the demand side, the overall domestic steel market demand declined. On the one hand, it is mainly due to the severe epidemic situation in some regions and the spillover effect, which has led to the shutdown of production in many regions, and the demand for related steel has been significantly reduced. The poor freight logistics caused by the epidemic also has a certain impact on steel sales. The new order index was 33.6%, down 5.7 percentage points from the previous month, which was a big drop. According to Shanghai Zhuo Steel Chain, the terminal demand for steel is not performing well, and there are obvious differences between regions. Among them, the areas seriously affected by the epidemic, especially East China, are difficult to release, while other areas are gradually recovering. Judging from the monitored terminal wire and snail procurement data in Shanghai, affected by the closure and control management, Shanghai terminal procurement stagnated in April. On the other hand, the slowdown in the growth rate of the real estate market has also weakened the support for the steel market to a certain extent. From January to March 2022, real estate development investment will increase by 0.7% year-on-year, the area of new housing construction will decrease by 17.5%, and the capital in place for real estate development enterprises will decrease by 19.6% year-on-year. Among them, in March, the real estate development prosperity index was 96.66, falling below 100. The investment situation in the real estate market is not good, and the capital availability rate has also continued to decline, which not only increases the pressure on the real estate development market, but also reduces the demand for steel.
Compared with domestic steel demand, which has dropped significantly, foreign demand has been rising steadily. An important reason is that geopolitical influence continues to expand, and steel export orders in Russia and Ukraine cannot be delivered smoothly. Therefore, some importers turn their orders to my country to fill the import gap. . The new export order index was 44.5%, up 1.6 percentage points from the previous month.
Figure 2 Changes in steel new orders index since 2018
Figure 3 Changes in the monitoring data of weekly purchases of terminal wire and snails in Shanghai since 2018
On the supply side, the epidemic has led to a reduction in production at steel mills. Due to the impact of the epidemic, freight logistics continued to be restricted in April. Especially in the first half of the month, the problem of logistics obstruction was more prominent. In the second half of the month, under the promotion of the policy of ensuring smooth flow, the logistics efficiency improved. However, from the perspective of the whole month, logistics still has an impact on steel There are certain constraints in the production of the factory, and there are difficulties in the input of raw materials and the output of finished products. In addition, the epidemic has also led to restrictions on the movement of people and employment. The production index and the purchasing volume index were 38.6% and 36.9%, respectively, down 6.8 and 4 percentage points from the previous month, and the decline was large, and both fell for three consecutive months. The employment index was 41.3%, down 5.4 percentage points month-on-month, and the backlog index was 46.6%, up 4.0 percentage points month-on-month, indicating that the number of normal employees working in enterprises decreased and the operating rate decreased. The finished product inventory index was 41.4%, up 10.2 percentage points month-on-month, indicating that due to transportation difficulties, steel mills had a backlog of products.
Figure 4 Changes in the steel production index since 2018
The hoarders remain in control of the market and I suspect will do so until the Fed sinks wider commodity prices.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
