Paper markets were weak again. I’ve switched now to the Dalian May contract, hence the big fall. It is still pricing $68. Physical followed. I still expect new 2014 lows in the next fortnight as the Hebei shutdown takes a hold. Reuters has texture:
October is normally a strong month for the steel sector in China, but a combination of weakening economic growth and massive industrial overcapacity has driven product prices down to multi-year lows. Buyers remain cautious about making any big iron ore purchases.
Traders said they expect prices to remain more or less the same for the rest of the year, having barely changed in October…Once hopeful for stimulus, the sector has generally come to terms with the idea that there is still more painful restructuring to come, as Beijingcontinues to press local governments to tackle pollution and overcapacity.
The government of Hebei, China’s biggest steel producing province, said on Thursday it had already closed 12 million tonnes of iron smelting and 9.77 million tonnes of steel production capacity in the first 10 months of the year.
Let me reiterate that you can currently buy physical iron ore for May delivery at $68 per tonne on the Dalian exchange. Why would any steel mill be restocking with any vigor over the next few months if this is the case?
We should take a moment to reflect upon this change in the market. The arrival of the Dalian iron ore future one year ago marked the beginning of the one way traffic down in iron ore prices. Of course a slowing China and rising supply played the dominant roles but Dalian was the first physical delivery iron ore future and it radically shifted market structure as well as psychology. A little blurb from 4-traders offers an insight:
In the iron ore futures market, with the open and transparent price formation mechanism, adequate attention and consultation of the market participants and full exploration and utilization of the information, the futures prices are open, transparent and predictive.
In terms of the effect of the price operation after the listing, with the constantly expanded market size and the continuously improved influence of the prices, the iron ore futures price has become one of the important reference prices influential on the market together with the Platts index, PB powder spot price, the CISA index and the SGX swaps. It is noteworthy that the futures prices have played some role in guiding the Platts index. The relevance between the iron ore prices and the Platts index is as high as 0.98, and the Platts index is released after the closing of the iron ore futures. Market analysts thus believe that in terms of time the futures prices will inevitably affect the formation of the Platts index and change the routine of the Platts index rising rapidly and falling slowly and recording more increases than decreases. The iron ore futures have begun to affect the pricing mode of the iron ore market. According to a recent market survey conducted by market institutions, among the 60 spot enterprises participating in the survey, 85% of the clients believe that the listing of the iron ore futures prompts the Platts index to objectively reflect the supply and demand of the domestic market.
Meanwhile, the correlation between the futures prices and the spot index prices at home and abroad is increasingly enhanced to stand above 0.97 at present, demonstrating the rationality and effectiveness of the futures prices. With the iron ore futures becoming increasingly brisk and the number of the participants gradually growing, the price difference between the spot price indexes at home and abroad and the iron ore futures shows the tendency toward stability. For example, at the early stage of listing, the indexes and the iron ore futures showed significant price differences, with the price difference between the SGX swaps and the iron ore futures recording the negatives. With the participation of the industrial clients and the quality of market operation continuously improved, the price difference between the iron ore futures and the related markets has been gradually narrowed.
In addition, the correlation of the iron ore and the coking coal, coke, rebar and other related products is increasingly enhanced, with the correlation indexes between the iron ore futures and the coking coal futures, the coke futures and the rebar futures on Shanghai Futures Exchange increased from 0.49, 0.15 and 0.29 respectively at the early stage of listing to more than 0.98 at present.
The iron ore futures prices and the spot index prices show basically the same trend of operation, indicating that the open and transparent futures market fluctuating around the spot market can soundly reflect the market supply and demand and provide more and more enterprises with reference for trading, and the prices have even affected the investment in international markets. According to a March report of “Australians”, an Australian media, the DCE iron ore futures contracts have adequately shown the prediction for the price fluctuation of the spot market, and even become a wind vane for the stock prices of the mining enterprises on the securities market. On March 10 in particular, the DCE iron ore futures contracts took the lead to go down, followed by the decline of the Platts spot price, and the futures prices guided the international investors in selling the stocks of BHP Billiton, Rio Tinto and other companies to avoid investment losses.
That is exactly right. Everything is now pricing off Dalian and probably the most important dimension of that is the “transparency” it brings. Pre-Dalian there was only the iron ore majors and the big and opaque iron ore trading houses that could corner the market. That meant prices could be pumped in the good times and swiftly rescued in the bad.
Synthetic futures and swaps could hedge the outcomes but not lead prices. The arrival of a Chinese physical delivery iron ore future took this system to the woodshed. Now steel mills could buy real iron ore many months in advance and look through short term price manipulations. It’s an under-appreciated aspect of how China has wrested control of iron ore pricing back from the big Australian miners.
$68 in May is not priced into equities.
Source: macrobusiness
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