Iron ore supply may be tight in the first quarter
Since December 2019, the resumption process of Brazilian mines has been lower than expected and the impact of Australian weather has been superimposed. The shipment volume of foreign mines has continued to decline, and the absolute amount is lower than the same period in the past five years. As of January 14th, the weekly iron ore shipments from Australia and Brazil were 16.077 million tons, a decrease of 4.01 million tons from the previous month, and the month-on-month decline for four consecutive weeks. We know that the first quarter is the rainy season in the southern hemisphere, and the supply of foreign ore is generally low throughout the year. Take the port of Hedland in Australia as an example. In the past 7 years, the iron ore shipment volume in the first quarter was higher than the average in the fourth quarter of the previous year. The decrease was 3.887 million tons. Then, in the context of the continuous port volume of more than 3 million tons in recent weeks, port inventories will continue to decline in the short term.
At the same time, the internal mines are in the seasonal shutdown phase, and the domestic mine operating rate and fine powder output have continued to decline since late November last year. Therefore, although we expect that mainstream mines will increase production by 70 million tons in 2020, and internal ore concentrates will increase by about 8 million tons, the situation of tight supply of iron ore in the first quarter will not change, which will support iron ore prices. .
Limited space for steel mills to continue replenishment
Under the influence of the higher profits of the steel mills in the early stage and seasonal factors, after mid-November last year, the steel mills carried out a round of stock replenishment of raw materials. As of January 8, the imported ore inventory of large and medium-sized steel mills across the country reached 19,920,100 tons. The low in mid-November rose by 4.864 million tons, which was a six-week recovery. However, we believe that the steel mills will have limited space to continue to replenish their inventory in the future. On the one hand, in terms of absolute quantity, the high point of iron ore inventory in the past five years has generally been 20 million to 23 million tons, and the inventory high point has shown a downward trend year by year since 2016. The current iron ore inventory is close to last year. 19.94 million tons of high point. On the other hand, from the point of view of the restocking time, the replenishment before the Spring Festival generally lasts 7-14 weeks, and the current restocking time is close to 8 weeks.
In addition, the high absolute price of iron ore suppresses the enthusiasm of steel mills to replenish inventory. Taking the price of iron ore in 2019 as an example, when the Vale dam failure and the Australian hurricane speculation reached its peak, the spot price of iron ore reached a high of US$126.35/ Tons, the current spot price of iron ore is close to US$100/ton. Under this background, steel mills are cautious about replenishing stocks in the future.
The narrowing of steel mill profits will limit the upside
Since November 2019, the obvious recovery of steel mill profits has been a major factor in this round of iron ore price rebound. However, after December, as demand weakened, steel prices fluctuated downward. East China third-grade rebar has been in December since the beginning of last year. It has fallen by 330 yuan/ton, and the profit of long-flow rebar has also fallen to 450 yuan/ton from around 800 yuan/ton at the beginning of the month. As the Spring Festival approaches, the demand for steel is shrinking rapidly. The transaction volume of building materials from 237 traders across the country has dropped to 63,600 tons, and steel stocks have also rebounded for 6 consecutive weeks. Considering that there is still a month of low demand after the Spring Festival holiday this year. , Inventory materials continue to accumulate. If the current growth rate of production and apparent consumption is expected, the high point of rebar stocks this year may be 14.5 million to 15 million tons, which is higher than the 13.5925 million tons during the Spring Festival last year. It is expected that the profit of steel mills will fall further in the future, which will suppress the room for rising ore prices.
Basis and spot forward premium indices fall back
Since December 2019, the iron ore main force 2005 contract has narrowed the lowest discount to 10.98 yuan/ton compared to gold Bubba powder, and is currently 18.02 yuan/ton. From a historical point of view, the main iron ore contract has only a small premium on a very rare occasion. Therefore, if there is no further positive stimulation of spot prices, the futures upside is extremely limited. At the same time, after entering the fourth quarter, the forward spot premium index continued to fall, indicating that the market is relatively pessimistic about the medium-term trend of iron ore prices.
On the whole, among the three main benefits that pushed up the price of iron ore in the previous stage, only the temporary tight supply still exists. At present, iron ore inventories in steel mills are already at a high level, and in the case of high absolute prices, it is cautious to replenish inventory in the future. In the context of shrinking steel demand, steel mills' profits may be further narrowed, and the decline in basis and forward premium index also has a negative impact on iron ore prices. Therefore, we believe that the later period of iron ore price fluctuations will be relatively weak. In terms of operational strategy, you can try to sell short rallies when the spot price of iron ore is close to US$100/ton or when the futures is flat. At the same time, you can consider buying some shallow out-of-value put options.