21 November 2018
- We assess short-term supply conditions as bearish. Tight supply has been a key driver in supporting prices in the past few weeks. However, in the latest update we are seeing a further deterioration in overall supply conditions with our Implied Forward Supply indicator suggesting the recent tightness is starting to abate. With lower shipments from key exporters in recent weeks, reduced volumes are being picked up by our Implied IO Imports Index which should support prices in the short-term. However, with our Forward Supply indicator showing early signs of a reversal, this could be short-lived. As downstream demand weakens and there is persistent de-stocking by steel mills, we have picked up an uptick in spot supply availability, which in our view are all price negative developments.
- We remain bearish on short-term demand. With steel mills’ margins remaining under pressure, steel rates continue to trend lower. This suggests lower iron ore consumption in the short-term. Our Domestic vs. Import Arb. continues to suggest a lower preference for seaborne ore which should add further downward pressure on prices. We have recently observed a large divergence between this indicator and the current seaborne price levels. In our view, should this persist prices will have to react at some point. Our Cash and Carry Arb. still reflects firm demand in the short term.
- Short-term macroeconomic conditions are bearish. The latest construction data confirmed our earlier estimates and we remain cautiously positive for November as our preliminary estimates show that construction activity (despite a marginal slowdown) remains higher than its long term trend. We continue to pick up weakness in overall currency conditions and credit availability which are both suggesting further weakness in prices. Persistent tightness in overall lending conditions has continued to attract our attention as it would continue to curb steel/iron ore demand in the short-medium term.