Since the end of March, iron ore has fallen into a narrow situation. Where is the fundamental logic that creates this dilemma? What is the change of supply and demand in the near future? Where is the main risk point in the second half of the year? This report will sort out the outlook one by one.
The source of wave narrowing? Structural surplus and high base port stocks: iron ore is more driven by structural supply and demand. This year, the supply of high-grade and medium-grade ores is abundant. Especially, as a kind of panel standard, the supply of PB powder, Jinbuba powder and other Australian mid-grade ores has increased significantly. The problem of structural oversupply of iron ore is caused.
The high base of port inventories has led to a heavy inventory burden if prices rise, which also reduces price elasticity.
Marginal improvement in recent Fundamentals: since July, shipments in Australia and Brazil have dropped sharply, with an average weekly decrease of 4 million tons. In the short term, the volume of shipments is decreasing. The market expects that the pressure from Hong Kong will ease at the end of July to the beginning of August.
The stock structure of the port has improved. In the six port stocks in the north, the proportion of middle and high grade ores dropped from 48% at the end of June to 46.9%. In terms of subdivision varieties, PB powder and Jin Bu Ba stock declined for two consecutive weeks.
In July, the monthly average price of the przewalskii index is now 63.48 dollars, and the depreciation of 6.4 to 6.8 leads to an increase of 29.5 yuan / ton of import cost. Before the fundamentals deteriorate further, the increase in import costs will lift the bottom of the price.
At the risk point of the second half of the year: considering the -8 month of July, the limited production in Tangshan, and the impact of a large limit on production after November, the daily output of pig iron will be reduced to 1 million 895 thousand tons in the second half of the year, and a total drop of 12 million 600 thousand tons in the second half of the year 2017. The demand for iron ore is reduced by about 20 million tons.
In the long term, the sintering machine will also be limited. Under the condition of the sinter shortage, the steel plant will add the proportion of the bulk ore and the pellet to the furnace, which is not conducive to the powder ore for sintering, and the futures plate is based on the powder mine.
Vale produced 179 million tons in the first half of 2018 and 211 million tons in the second half of 2018 to meet its annual target of 390 million tons. The ring is 32 million 580 thousand tons in the first half of the year. If Brazil shipments increase as scheduled, it will cause pressure on the spot of Brazil mine. As a result, the price performance of PB powder and Jabba powder dropped, and the Australian silverware also had downward pressure.
Since the end of March, iron ore has fallen into a narrow situation. Since the end of May, the fluctuation range of the 09 contract has narrowed down to the inter cell area of [450480]. Where is the fundamental logic that creates this dilemma? What is the change of supply and demand in the near future? Where is the main risk point in the second half of the year? This report will sort out the outlook one by one.
Sources of volatility narrowing: structural surplus and high base port stocks
(1) structural oversupply of the supply side
From the perspective of aggregate supply, domestic iron ore supply contracted this year. In the 1-6 months of 2018, the cumulative import volume of 5.3 tons was 7 million 460 thousand tons, down 1.4%. In terms of domestic ore production, it is difficult to quantify the raw ore output of the bureau because of grade conversion. We use the data of 266 mine fine powder output statistics of the steel union caliber, from the beginning of 2018 to the week of July 20th, the average daily output of iron powder is 393 thousand tons, 432 thousand tons in the same period in 2017, 9%, and the cumulative output reduction of about 7 million 800 thousand tons. The steel joint sample accounts for about 50% of the total output of the country. Accordingly, the domestic refined powder is estimated to be reduced by about 15 million 600 thousand tons.
However, iron ore is more driven by structural supply and demand. From the view of the structure of imported mines, the three major mines, especially the freshwater valleys, Rio Tinto and BHP, have occupied the market space of other non mainstream mines. At present, Vale, Rio Tinto and BHP Billiton all announced the 2 quarter of 2018.
From the two point of the main disk, the output in the 2 quarter is in line with expectations. The structure of Rio Tinto's output changes is also more obvious. Although the total volume of the contraction, but mainly from the Canada Company's fine powder, pelletizing mineral resources decreased, the production of the Australian pelbara region is still up 7.2%, of which PB powder production increased by 7.7%. BHP Billiton's output increased by 3.5% over the same period last year, while the output of Jin Bu Ba mining area increased significantly, and the 9 million 200 thousand quarter increased by 2 in the same quarter. From the quarterly reports of the major mines, the output in the 2 quarter increased significantly. Especially in vale, due to more rain in the 1 quarter, the 2 quarter began to catch up with the annual output target, an increase of 14 million 800 thousand tons. Nevertheless, to achieve this year's output target of 3.9 billion tons, output will still need to rise by 32 million 580 thousand tons in the second half of this year. Therefore, in the second half of the year, the pressure on Brazil shipments is still large.
Overall, the supply of high-grade and medium-grade ores is abundant, especially the varieties as the surface standard, PB powder, Jinbuba powder and other Australian mid-grade ores, supply increment is obvious. The problem of structural oversupply of iron ore also suppressed the price rebound.
(two) high base port stocks reduce price elasticity.
Since 2018, port stocks have exceeded 1.5 billion tonnes and reached 1.62 billion tons at the end of March. Although it has declined since June, it has been maintained at over 1.53 million tons. The high base of port inventories has led to a heavy inventory burden if prices rise, which also reduces price elasticity.
From the point of view of inventory structure, the inventory of non mainstream varieties outside Brazil and Australia remained stable. The increment of Australia and Brazil is the source of stock increment. In particular, Australian ore inventories continued to rise from 80 million tons at the beginning of the year to nearly 1 million tons.
Recent marginal improvement of basic surface
Since July, the price of iron ore futures has slowly rebounded and the bottom has been rising gradually. This is mainly due to some marginal improvements in recent fundamentals.
(1) short delivery of shipments
Since July, due to the end of the 2018 fiscal year of some Australian mines, the port has been overhauled. There was a short and obvious drop in shipments. In July, the average delivery volume in Australia and Brazil was about 21 million 400 thousand tons / week. Compared with June, an average of 25 million 800 thousand tons / week, a decrease of 4 million tons / week. In the short term, the volume of shipments is decreasing. The market expects that the pressure from Hong Kong will ease at the end of July to the beginning of August.
However, it needs to be stressed that the decline of shipments is a short-term phenomenon. From the annual plan of Vale Valley, Rio Tinto and BHP Billiton, the supply increment pressure is still more obvious in the second half of the year. Starting from August, shipments will return to a high level from a seasonally perspective.
(two) the margin of inventory structure has improved, and the PB premium has rebounded.
Driven by the drop in shipments, port inventory structure has improved. In the northern main ports (Caofeidian, Beijing Tang, Tianjin, Qingdao, Rizhao and Lian Yun), in the six northern ports, the proportion of middle and high quality mines has declined from July, from 48% at the end of June to 46.9%. Judging from the historical performance, the proportion of the stock and the price trend of iron ore show a more obvious negative correlation. In terms of subdivision varieties, PB powder and Jin Bu Ba stock declined for two consecutive weeks.
The marginal improvement in inventory structure also boosted the PB premium in the US dollar market. Due to the structural shortage this year is the domestic ore, Brazil mine and other low aluminum varieties, resulting in Pakistan, BRBF and other Brazil mine premium soaring. After the price difference was opened, the price performance of PB powder was highlighted. Meanwhile, the quality of PB powder has picked up after the launch of the new Rio Tinto RTX. In the US dollar market, the premium of PB powder rose from -1 dollars in early July to -0.7 to -0.6 dollars. It also reflects the steel factory's preference for PB powder.
(three) exchange rate factors are gradually fermented to push up the cost of iron ore imports.
Since mid June, the RMB exchange rate has depreciated rapidly, from 6.4 to over 6.8. This will boost the cost of iron ore imports. In July, the monthly average price of the przewalskii index is now 63.48 dollars, and the depreciation of 6.4 to 6.8 leads to an increase of 29.5 yuan / ton of import cost. Before the fundamentals deteriorate further, the increase in import costs will lift the bottom of the price.
Where is the risk point in the second half of the year
Although the recent price rebounded slightly, but for the second half of the trend of mineral prices, the overall is still not optimistic. For the second half of the risk point. There are mainly the following aspects.
(1) the impact of limited production on demand will increase in the second half of the year.
This year is a green year. Environmental policy is no longer confined to 2+26 cities, nor is it confined to the heating season. After the normalization of environmental protection and limited production, demand for iron ore has been continuously suppressed. At present, the limited production of normalization is mainly in areas with poor air quality, such as Tangshan, Handan and Xuzhou. In the second half of the year, especially after the November heating season, Beijing, Tianjin and Hebei and the surrounding areas, the Yangtze River Delta, the Fen Wei plain three key areas, if a large range of production limit appears, the blast furnace start rate will continue to decline substantially.
According to our calculations, considering the -8 month of July, the limited production in the Tangshan region, and the impact of a large limit of production after November, the daily output of pig iron will be reduced to 1 million 895 thousand tons in the second half of the year, and a total drop of 12 million 600 thousand tons in the second half of the year 2017. The demand for iron ore is reduced by about 20 million tons.
In addition to the impact on aggregate demand, frequent and long-term production restrictions will also have an impact on the demand structure of iron ore. In the long term limit production, the steel plant sinter machine will also be limited production. Under the condition of the sinter shortage, the steel plant will add the proportion of the bulk ore and the pellet to the furnace, which is not conducive to the powder ore for sintering, and the futures plate is based on the powder mine.
In November 2017, after the 2+26 city began to limit production for a long time, the ratio of sinter into the furnace began to operate at a low level. It was not until March 2018 that the end of the production limit began to pick up. This will happen in the second half of 2018.
(two) supply in the second half of the year is increasing seasonally, with particular attention to the delivery pressure of Brazil.
For Australian and Brazilian mines, seasonal shipments were high in the 3-4 quarter, and will remain high on platforms since August when shipments resume high. The supply margin will increase in the second half of the year.
Special attention is paid to the pressure on shipments in Brazil. As mentioned in the previous article, the price difference between Brazil mining and Australian middle grade mines has begun, and the price ratio of PB powder has begun to highlight, which is one of the driving factors for the recent rebound. However, there is still increasing pressure on Brazil shipments in the second half of this year. The production of fresh water valley in the first half of 2018 is 1.7871 million tons, while the target of fresh water valley in 2018 is 3.9 million tons. According to this, the output of the second half of the year will be up to 2.11 billion tons to achieve the annual target, which is 32 million 580 thousand tons in the first half of the year.
If Brazil shipments increase as scheduled, it will cause pressure on the spot of Brazil mine. As a result, the price performance of PB powder and Jabba powder dropped, and the Australian silverware also had downward pressure.
