Pig Iron Production Continues to Decline, Fundamentals Remain Weak—What Is the Outlook for Iron Ore After Two Consecutive Weeks of Decline? [SMM Commentary]

SMM December 27 News:

Lacking favourable macro front drivers and with pig iron production declining for three consecutive weeks, the continued weakening of fundamentals has caused iron ore to fluctuate downward recently. As of the close of the daytime session on December 27, iron ore fell by 2.63% to 759.5 yuan/mt. Iron ore futures also recorded a two-week decline, with this week's weekly drop at 1.81%.

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Fundamentals

Supply

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Demand

Supply side, according to SMM shipping data, Brazil's shipments increased significantly by nearly 30% this week, driving global iron ore shipments up 1.8% WoW. Australia's shipments are expected to increase in the future, which will slightly boost global shipments. Although domestic iron ore resources remain tight, from a global perspective, iron ore supply has been relatively ample throughout this year.

Demand side, pig iron production has declined for three consecutive weeks, suppressing the market performance of iron ore! According to the SMM survey, as of December 25, the operating rate of blast furnaces at 242 steel mills surveyed by SMM was 85.37%, down 0.1 percentage point WoW. The capacity utilisation rate of blast furnaces was 86.91%, down 0.1 percentage point WoW. The daily pig iron production of the sample steel mills was 2.3446 million mt, down 3,000 mt WoW. This week, due to the continued pressure on steel mill profits, some steel mills in certain regions experienced losses again. Coupled with the impact of annual maintenance plans at some steel mills, overall pig iron production showed a downward trend.

Inventory

Inventory data shows that as of December 27, according to SMM monitoring data, total inventory at 35 ports was 144.99 million mt, down 860,000 mt WoW but up 28.15 million mt YoY. The daily port pick-up volume of imported ore was 3.127 million mt, down 4,000 mt WoW but up 270,000 mt YoY. Affected by previous shipment volumes, port arrivals decreased significantly this week. On the port cargo pick-up side, steel mills' winter stockpiling was not active, with most adopting a purchasing-as-needed strategy, leading to a slight decline in port pick-up volume. Overall, due to the significant decrease in arrivals, port inventory showed a destocking trend. Looking ahead to next week, port arrivals are expected to increase.

Outlook

Looking ahead, terminal demand entering the off-season has weakened steel mills' willingness for winter stockpiling, while more blast furnaces are undergoing annual maintenance, and pig iron production continues to decline, suppressing iron ore demand. As pig iron production at steel mills is expected to continue declining, port pick-up volume may decrease, potentially leading to a slight inventory buildup at ports. However, the overall ample supply of iron ore remains unchanged. Without significant favourable macro front developments, iron ore is expected to continue fluctuating downward. Nevertheless, considering steel mills still have restocking demand before the Chinese New Year, this may provide some support for iron ore, limiting its downside potential.

Institutional Opinions

Southwest Futures stated: The impact of macro events has temporarily subsided, and the market has returned to being driven by industry logic. From an industry perspective, iron ore demand has declined for the fourth consecutive week, with national daily pig iron production falling to around 2.29 million mt. On the supply side, iron ore supply remains steadily increasing. Iron ore port inventory remains high and has increased WoW. Overall, the supply-demand pattern of iron ore still shows characteristics of oversupply. From a valuation perspective, iron ore's valuation level is the highest among ferrous metals series. Therefore, considering both drivers and valuation, iron ore futures prices may face resistance and pull back. From a technical perspective, iron ore futures may have formed a short-term top. Strategically, investors can focus on shorting opportunities at high levels while managing positions carefully.

CITIC Futures believes: On the supply side, year-end shipment pushes from overseas fell short of expectations, and domestic port arrivals are unlikely to improve significantly, leading to a temporary easing of inventory buildup pressure as port inventory undergoes destocking. On the demand side, apparent steel demand weakened this week, and pig iron production still faces pressure for cuts. However, considering that steel mills remain marginally profitable, the room for further production cuts is relatively limited. Recently, steel mills' imported ore inventory has shown a trend of accumulation, with some mills beginning pre-holiday restocking. However, the space for winter stockpiling is expected to be limited. From a macro perspective, overseas disturbances persist, while domestic policies have entered a lull, leaving market sentiment temporarily cautious. In the short term, iron ore futures are expected to fluctuate.

Industrial Futures pointed out: On the macro front, expectations for domestic macro policies to continue supporting the economy remain. The US dollar index remains strong, staying above 108, exerting pressure on gold and base metals. On the mid-level front, domestic blast furnaces are gradually reducing production, with daily pig iron production falling below 2.3 million mt. Steel mills' winter stockpiling progress is more than halfway through. This year, steel mills' profitability has been weak, leading to a cautious pace of raw material restocking. Attention should be paid to the remaining restocking space and pace for imported ore by steel mills from January to the Chinese New Year. On the supply side, since Q4, the shipment push from the four major mines has been significantly weaker than the same period in previous years, with increasing instability in overseas mine shipments. At year-end, domestic mine operating rates are gradually declining. From a valuation perspective, considering the spot-futures price spread of iron ore and the low immediate profits of steel mills, iron ore valuation remains relatively high within the industry chain. In summary, while iron ore fundamentals provide support, its valuation remains relatively high within the industry chain. Iron ore prices should watch for resistance at 820 and support at 750-760.