The contradiction between supply and demand alleviates the iron ore adjustment pressure in the short term.

SMM: iron ore short-term adjustment pressure iron ore futures showed a sharp correction, the first trading day after the Dragon Boat Festival, the main 2009 contract fell more than 4%. We believe that the problem of tight balance between iron ore supply and demand has been alleviated in stages. On the one hand, Australian mine annual impulse superimposed VALE shipments continued to recover in June, and iron ore supply increased significantly; on the other hand, with the continuous contraction of steel mill profits and the re-production restrictions in Tangshan in July, the intensity of iron ore demand may have weakened. The result of the phased easing of supply and demand is that in the later period, iron ore port inventories still have the possibility to continue to rise, and mineral prices still have certain adjustment pressure in the short term.

Shipments from mainstream mines rebounded significantly in June.

After entering June, shipments from mainstream mines in Australia and Brazil have rebounded obviously. since June, the average shipments between Australia and Brazil have been 18.07 million tons and 6.77 million tons, respectively, while the average shipments from January to May are 15.46 million tons and 4.74 million tons, respectively, an increase of 17% and 43% respectively.

For Australia's three major mines, June is a financial year, impulse pressure led to a significant increase in the intensity of shipments, weekly shipments are in the high level of the same period in history. In Brazil, VALE shipments remained in the doldrums in the first five months, and the Brazilian New Crown pneumonia epidemic began to spread in June. The market was once worried about VALE shipments in June, but in fact, the impact of the epidemic on overall VALE production shipments weakened. Brazilian shipments continued to recover from low levels in June, constantly setting new weekly shipping highs this year. The simultaneous rise in Australian and Brazilian shipments in June eased some supply-side concerns, but later shipments in Australia and Brazil remain to be seen given the great uncertainty that could be brought about by this year's global outbreak.

Steel mill profit contraction superimposed production limit

In fact, domestic demand for iron ore has been relatively strong so far this year. According to the Bureau of Statistics, the cumulative output of pig iron from January to May 2020 was 356 million tons, compared with 335 million tons in the same period in 2019, an increase of 1.5% compared with the same period last year. The hot metal production of dagger Mysteel also shows that domestic hot metal production is constantly setting a new record high.

Strong domestic demand is an important reason for the sharp rise in iron ore since the beginning of the year, but we need to note that although iron ore and coke have risen by a large margin so far, rebar and hot coils at the finished end are relatively limited, resulting in a continuous contraction in steel profits. According to our calculation, at present, the rebar and hot coil are in a state of small profit, especially the profit of rebar is in the low range. When steel mills have normal or good profits, the willingness to start construction and increase production is extremely strong, but when profits continue to shrink and may even begin to test costs, the willingness to purchase raw materials will be significantly affected. In other words, the positive profit of steel mills is an important guarantee for the maintenance of high demand growth of iron ore. Once the profit of steel mills is poor, the growth rate of iron ore demand may face correction. At this stage, the continuous contraction of steel mill profits may become an important hidden danger of iron ore demand in the future.

In addition, Tangshan today released a plan to limit production in July, which is more detailed than in the previous period, and specific production restrictions have been made for each steel plant, and the market is generally expected to strengthen the production limit than before. According to the relevant statistics of the market, if production restrictions are strictly implemented or affect the average daily hot metal output of more than 100000 tons, there will be a reduction in iron ore demand of nearly 5 million tons in that month.

The accumulation of port inventory may continue.

Due to the continued rebound in foreign mine shipments, domestic iron ore port inventories rose 1.6394 million tons month-on-month last week, ending the previous nine consecutive month-on-month decline. Taking into account the high shipments of foreign mines and the high number of ships in the port, the increase in port inventory may continue in the next 2 weeks.

Overall, we believe that the problem of tight balance between supply and demand in the early stage of iron ore has been alleviated in stages, and the intensity of iron ore demand may have weakened as the profits of steel mills continue to shrink and production restrictions in Tangshan began again in July. In the later period, there is the possibility that the iron ore port inventory will continue to rise, and the ore price still has a certain adjustment pressure in the short term.

Scan the QR code and join the SMM metal communication group.