[SMM Iron Ore] Short covering lifts iron ore; faster port restocking casts doubt on follow-through

Iron ore prices fell before rebounding over the week from the 29 October close to the 5 November close. The SGX most-traded contract rose from $90.24/mt to $93.50/mt, up $3.26 or 3.6% on the week, and the close was the highest since 30 September. Thursday alone added $1.80, more than half the weekly gain. The DCE most-traded I2701 contract probed lows of 671-675 yuan/mt from Monday to Wednesday, then rose on Thursday and Friday to close at 691 yuan/mt, up 9 yuan or 1.3%. The MMI 61% port spot index edged up from 654 yuan/wmt to 658 yuan/wmt, a gain of 0.6%, with spot lagging the futures market by a clear margin.

The USD/CNY central parity moved from 6.7147 to 6.7156, up 9 bp, a marginal weakening of the yuan with negligible effect on the converted price. Converted at central parity with 13% VAT, the SGX contract rose from 684.7 yuan/mt to 709.5 yuan/mt. The DCE discount to the converted SGX price widened from 2.7 yuan/mt to 18.5 yuan/mt, and ranged between 14 and 21 yuan/mt during the week. Offshore gains exceeded onshore gains, and spot lagged both. The rally was led by the SGX and futures money, with port spot following passively. On weekly averages, the SGX contract averaged $91.69/mt over five sessions against $90.13/mt the week before, up $1.56; the DCE contract averaged 678.1 yuan/mt against 672.9 yuan/mt, up 5.2 yuan.

Figure 1: Onshore and offshore prices and spread (SGX $/mt; DCE, converted price and spread yuan/mt; MMI yuan/wmt). Source: SGX, DCE, CFETS, SMM

Figure 2: SGX converted CNY price vs DCE I2701 and spread (yuan/mt). Source: SGX, DCE, CFETS

Supply: shipments up, arrivals down, port stocks building faster

SMM shipping data show global shipments from 123 ports in the week to 30 October at 34.3119 million mt, up 862,500 mt week-on-week for a second straight weekly rise. Australian shipments fell 1.1789 million mt to 18.5359 million mt; Brazilian shipments rose 272,700 mt to 8.5097 million mt, a third consecutive weekly increase. Shipments bound for China fell 1.5735 million mt to 21.1744 million mt. Arrivals at 61 Chinese ports fell 4.3413 million mt, or 15.7%, to 23.2663 million mt, the lowest since September.

Port stocks did not draw despite lower arrivals. Imported iron ore stocks at 35 Chinese ports stood at 149.13 million mt on 6 November, up 1.08 million mt week-on-week after a 300,000 mt rise the week before, a clear acceleration. Stocks have risen 5.64 million mt from the 11 September low of 143.49 million mt. Average daily port outbound volume fell 55,000 mt to 3.12 million mt, a second straight weekly decline. Stocks building faster while arrivals fall shows outbound volume contracting faster than inflow: slower mill offtake is the main source of the current build. Stocks at the 10 key ports stood at 104.68 million mt on 5 November, up 630,000 mt, with concentrate and lump building while fines and pellet drew, the same direction for fines as the week before.

On freight, the Brazil-China route rose from $35.51/mt to $36.76/mt and is now up about 20% from the 19 October low of $30.46/mt; the Australia-China route eased from $14.45/mt to $13.48/mt. The two routes have diverged. Higher Brazilian freight gives some floor to forward landed costs, but its pass-through to port spot within the week was limited.

On the mining side, Vale's third-quarter output was 88.35 million mt, down 6.4% year-on-year, with full-year guidance of 335-345 million mt unchanged. Reaching the bottom of that range requires fourth-quarter output of at least 92.72 million mt, 4.9% above the third quarter. The four majors produced a combined 292.5 million mt and shipped 292.7 million mt in the third quarter, with no change to annual guidance. The expectation of high fourth-quarter shipments from the majors is intact, and three straight weeks of rising Brazilian shipments are already confirming it.

Figure 3: 35-port imported iron ore stocks and arrivals at 61 ports (million mt). Source: SMM, SMM shipping data

Demand: hot metal still falling, but maintenance losses are narrowing

Average daily hot metal output at 242 steelmakers was 2.3573 million mt on 4 November, down 4,800 mt week-on-week. The blast furnace operating rate fell 0.24 percentage point to 87.06%, and capacity utilisation was 87.01%. Hot metal has held in a 2.35-2.36 million mt band since stepping down from 2.3882 million mt at the end of September. This week's fall was small, but it ended two weeks of modest gains.

The change in maintenance losses carries more information. Hot metal lost to blast furnace maintenance in the week of 31 October to 6 November was 1.6983 million mt, down 57,900 mt week-on-week, a second straight weekly narrowing after a 14,900 mt decline the week before, and 134,000 mt below the 16 October peak of 1.832 million mt. SMM expects next week's loss at 1.685 million mt, down a further 13,300 mt. Maintenance is narrowing but hot metal is not recovering in step. The gap comes from autumn-winter production controls and the 18+5scheme in Handan and Wu'an, Hebei, which are not counted as maintenance. In October, 17 blast furnaces nationwide entered maintenance and 14 resumed; maintenance cut hot metal by a net 7.88 million mt, 1 million mt more than in September.

Mill margins are the weakest link on the demand side. The spot loss on long-process rebar widened from 110.65 yuan/mt on 29 October to 130.61 yuan/mt on 5 November, and reached 148.54 yuan/mt on Wednesday, the deepest since 30 September. With losses deepening, mills kept pushing coke prices down and expectations of a third round of coke price cuts rose. If the cut lands, cost pressure on mills eases and the negative feedback loop in ferrous markets weakens. That improves mill margins; it does not add iron ore demand. Hot metal remains under downward pressure from heating-season restrictions and the seasonal softening of construction steel demand. Port spot trading was moderate throughout the week, with mills enquiring cautiously and buying as needed. Restocking patterns did not change and offered no price support.

Figure 4: Average daily hot metal output at 242 mills and hot metal lost to maintenance (million mt). Source: SMM

Figure 5: Brazil/Australia to China freight ($/mt) and long-process rebar spot margin (yuan/mt). Source: SMM

Marginal factors: position unwinding drove the rebound; contract talks remain unresolved

Thursday's rise did not come from fundamentals. Funds that had been long energy and short ferrous unwound positions, lifting the whole ferrous complex. Iron ore futures rose for two straight sessions and the SGX contract gained $1.80 in a day. Whether a rally driven by position adjustment holds depends on whether a new bullish driver takes over. This week fundamentals offered only two: narrowing maintenance and expected coke price cuts. Neither changes the direction of port restocking or falling hot metal.

On long-term contracts, talks between the two major Australian miners and the Chinese side have concluded; FMG has not yet reached agreement. Mid-week, market expectations that port restrictions on SSF would be lifted cooled, and some participants argued that if the restrictions stay, tight deliverable supply in the short term would support futures. Once the roughly 12 million mt of SSF stocks are released, pressure on low- and mid-grade port supply would rise markedly. This is the single largest variable to track in the coming weeks.

Outlook: SGX likely in $90-95/mt next week; the top of the range needs a new driver

On fundamentals, port stocks are still building after the fall in arrivals, hot metal has not recovered, and mill losses are deepening. The supply-demand balance continues to weigh on prices. The money-driven rebound has already taken the SGX contract back to its highest since late September; further upside needs a coke price cut to land or a real recovery in hot metal. The SGX most-traded contract is likely to trade in a $90-95/mt range next week. If 35-port stocks build for a third straight week without the increase slowing, prices may return to the lower end of $90-92/mt. Three data points to watch: whether the next 35-port stock reading halts the acceleration in restocking, whether maintenance losses keep narrowing and hot metal stops falling, and whether the third round of coke price cuts lands.

Over the next quarter, two supply increments are already visible. For Vale to reach the bottom of its guidance, fourth-quarter output needs to be 4.9% above the third quarter; three weeks of rising Brazilian shipments are the start of that pass-through, and on a 35-45 day voyage the extra arrivals are likely to concentrate in December. If FMG's SSF stocks are released as contract talks conclude, port fines supply would increase within one to two weeks. On the demand side, the scope and enforcement of heating-season restrictions will set the slope of the hot metal decline. Rising supply against falling demand is unlikely to reverse this year; the price centre is likely to stay near $90/mt with limited room to rebound.

**This commentary is for reference only and does not constitute a basis for decisions.