A week-late macro policy finally materialized. On September 24, the central bank announced a series of growth-stabilizing measures:
1. Lowering the reserve requirement ratio and policy rates;
2. Reducing the mortgage rate on existing home loans and standardizing the minimum down payment ratio;
3. Creating new policy tools to support the stock market development.
The long-awaited favorable policies have finally been implemented, exceeding market expectations. Market sentiment is quite exuberant, with iron ore futures surging significantly for two consecutive days, marking the largest increase of the year at 4.64%. On September 25, the most-traded contract I2501 peaked at 730.5 yuan/mt and hit a low of 657.5 yuan/mt, with a price spread of 73 yuan/mt in just one day. The increase is substantial. Macro policy stimuli are often short-lived, and long-term price improvement requires fundamental support. So, what is the situation with iron ore fundamentals?
Supply side: September is the last month of Q3. According to SMM shipping data, some mines tend to boost shipment volumes at the end of the quarter, especially in Australia. Overall shipment volume is expected to grow in September and remain stable in October. Brazil's shipment volume is relatively stable with fewer external disruptions. Unlike mainstream mines, non-mainstream mines have maintained low shipment volumes since August due to declining ore prices. However, with the rebound in ore prices, shipment volumes are expected to moderately increase. Domestically, safety inspections in Hebei are nearing completion, and some halted mines plan to resume production, with some increase expected. However, due to demand and price impacts, the increase may be limited. Overall, foreign mine shipments remain high, and domestic mines have an expectation of increase. Overall supply is expected to remain high.
Demand side: The September peak season did not meet expectations, and end-user demand remains sluggish, also affected by typhoon weather. Both construction materials and sheets & plates demand are below expectations. Although steel mills' profits have improved, most varieties are still in a slight loss state. The progress of blast furnace resumption is continuously delayed, and the recovery speed of pig iron production is relatively slow. According to SMM weekly pig iron data, by the end of September, daily pig iron production increased by about 40,000 mt compared to the beginning of the month. Additionally, SMM weekly blast furnace maintenance impact data indicates that although steel mills have production resumption plans in October, the recovery of pig iron production is expected to be limited. Since mid-September, due to the impact of the National Day holiday, some steel mills have stocked up in advance, significantly boosting iron ore demand, especially in late September, with active spot market transactions and a significant increase in overall iron ore demand. After the National Day, some steel mills still need to replenish inventory, but the demand is weaker than before the holiday, providing limited support for ore prices.
Inventory side: Benefiting from high shipment volumes, low arrivals, and high port pick-up volume, port inventory continues to decrease. However, with the end of typhoon weather impacts, port congestion will ease, and arrivals are expected to increase rapidly, potentially leading to continued accumulation of port inventory. This will exert significant downward pressure on port spot prices.
In summary, SMM believes that in the short term, iron ore demand will significantly increase, mainly due to the recovery of pig iron production and pre-holiday restocking factors. Meanwhile, the supply side remains in peak season, with relatively loose supply expected, and next week's arrivals are expected to increase significantly, leading to a brief consumption of port inventory followed by re-accumulation. Therefore, the overall supply-demand mismatch has not been significantly alleviated. However, recent frequent favorable macro policies have clearly improved market sentiment, and under the influence of expectations, short-term ore prices still have room to rise. In the long term, attention should be paid to whether end-user demand in the peak season improves significantly. If end-user demand increases significantly and steel mill blast furnace resumption speeds up, it will continue to provide strong support for ore prices. Conversely, if end-user demand growth is not significant, iron ore demand may decline, and ore prices may pull back from highs.
