3 May 2019
- Short-term supply conditions are bullish. We have picked up some tightness in supply from our Forward Supply indicator. This was also captured by our Implied IO Imports Index which is displaying some tightness going into week 20. Re-stocking efforts have been useful in absorbing the additional material arriving into China since week #17. We also believe such actions were motivated by the improving steel margins that had been in force since week 10. As a result, we continue to see tightness in spot supply.
- Following our latest assessment, we turn bearish on short-term demand conditions. Steel Mills’ margins look to retract from its previous highs in week #16 as weakening FX rates as well as higher feedstock prices combined to put overall margins under pressure. If such trend holds, further retraction in steel rates is expected. Our domestic vs imported arb indicator is lower preference for seaborne material vs domestic ore which is a price negative development. Our cash and carry arb too weakened, which reaffirms the weakening near-term demand conditions.
- Downstream steel demand (manufacturing and construction) remains firm, with the latest manufacturing data reflecting a renewed incentive to re-stock manufactured goods which should incentivize IO demand. However, our currency models demonstrate weakness given the recent strength in the dollar. Our models are also showing improved credit conditions since bottoming in week #14. This should go on to support short-medium term demand.