19 December 2018
- Our assessment of overall short-term supply conditions remain bearish. We picked up deteriorating supply conditions as higher imports are expected to arrive into China over the next 2 weeks. This is expected to add downward pressure on prices. The above is likely to be exacerbated by persistently weak re-stocking efforts by mills. We believe such actions could be the culmination of various factors (discussed in the thought). With higher arrivals and de-stocking by mills, we pick up a further uptick in spot supply. As such, as it stands is expected to add further downward pressure on prices in the short-term. The supportive driver remains in our forward supply indicator which shows some element of tightness. However, notably it is displaying some early signs of abating.
- Overall demand conditions remain bearish. Margins remained under pressure which would continue to put pressure on steel rates in the short-term. This is likely to curb demand for iron ore. Our Domestic vs. Import Arb. remains firmly supportive of higher preference for seaborne ore and therefore positive for prices. Our cash and carry arb. remains weak which reflects a temporary weakness in short-term demand. However, it looks to be stabilizing and indicating a possible rebound.
- Short-term macroeconomic conditions are marginally bearish. With the latest release of overall construction activities, we pick up further improvements in overall construction demand which would remain supportive of iron ore prices.
- Currency conditions remain firmly negative towards IO prices. Interestingly, we take notice the ongoing divergence between the current price action and what the indicator otherwise suggests. If this persists, we expect the strength of the USD to catch up with the overall price formation of iron ore (e.g. weeks# 4-10).
- Credit conditions improved markedly with the re-emergence of new credit injections. This should continue to support the market going into 2019.