Edward Meir/INTL FCStone Mar. 2014 Report - FERROUS

SHANGHAI, Mar. 5 (SMM) - The following is an excerpt from monthly market overview for March 2014, written by Edward Meir, Indepent Commodity Consultant with INTL FCStone Inc.

NYMEX HRC

Readers may recall that last month the late January price indicated an end to the bull market for flat-rolled steel. We entered February with spot prices holding around the $670/ton level, but prices plunged double digits in each of the last few weeks to a final weekly print for February of just $638/ton. So while the average was in line with our expected support, the spot price actually saw no support at all around the $650/ton level. This is due primarily to imports; we noted last time that readers should “expect imports to continue arriving in February, and that will keep the pressure on prices”, but this is now looking like an understatement. January imports saw a major rise (over 30%) as expected, but the February tonnage kept rolling in and that left the domestic spot markets starved for orders. The result was EAF production racing to as low as $630/ton by month end, while larger-sized deals were conducted well below that figure. So the question is how much lower can we go from here? Supply and demand are irrelevant right now, as major buyers see the market in a free fall. The result is often an overshooting to the downside, likely to next support at $600-615/ton. Indeed, Q2 valuations are already trading near that level. It would also be wise not to ignore the potential damage the mills have done to themselves by playing hardball in 2014 contract negotiations and avoiding discounts. If those mills feel being in the spot market will suit them better than index based deals, they may be thinking about a change of tune by Q2. Contribution by Spencer Johnson.

IRON ORE

Volatility in iron ore prices has become par for the course in recent years, but things have really cranked up a gear this past month. The steep decline in rebar prices is finally starting to take its toll on I/O more directly after the two seemed to have displayed remarkable tendencies to diverge at times. Last month, the most active SHFE rebar contract (May) fell from $568.76/ton to $540.33/ton by month’s end. This 5% decline, on top of the 11% dip seen in the previous two months, now leaves China with a lot of very cheap steel that needs a home, which we don’t see materializing on the back of a cheaper RMB. For its part, I/O has started to respond to weaker steel prices, with prices now down to an eight-month low of $118. In addition, iron ore stocks at 43 Chinese ports are at an all-time high of 101 million tons; because these inventories are being offered for cash, it’s slow going on the buying side, especially in the current Chinese credit environment.  We have long been making the case that the Chinese are simply producing too much steel and that more cutbacks are inevitable. As these start to materialize with greater frequency due to the ever-tightening credit environment and shrinking margins, we should start to see more of a loopback into iron ore prices, with March perhaps being the month that bears will have something more to cheer about. Support for prices in March is seen at $114, with resis-tance at $122. Contribution by Spencer Johnson in NYC.

INTL FCStone, Inc. and its affiliates assume no liability for the use of this information contained and expresses no solicitation to buy or sell futures, options on futures contracts, or OTC products. Commodity trading involves risks and past financial results are not necessarily indicative of future performance. Any hypothetical examples given are exactly that and no representation is being made that any person will or is likely to achieve profits or losses based on those examples. Reference to and discussion of OTC products are made solely on behalf of INTL Hanley, LLC. Reproduction without authorization is forbidden. All rights reserved.