The bounce goes on. Paper markets are dead-catting it nicely and physical is in train. The Baltic Dry capesize was up a disappointing 2%.
Steel isn’t interested. Rebar futures barely squeaked and rebar average is sailing happily into the abyss.
Filling the gap between the two, iron ore port stocks rebounded to a record high.
In short, there is nothing sustainable about this bounce. Reuters has texture:
“Tighter credit will exacerbate the oversupply situation in the market and will send iron ore prices even lower. The next level I’m looking at is $80,” said Helen Lau, senior mining analyst at UOB-Kay Hian Securities in Hong Kong.
…”It is very troublesome and time-consuming getting L/Cs from Bank of China now and we basically have stopped trying,” said an iron ore trader based in Shandong, adding traders who had failed to get credit had sold off iron ore stocks.
“Many iron ore traders will be wiped out this year and next due to the cut-off in credit.”
Another trader said his company had failed to obtain an L/C from BOC’s Shandong branch to book one cargo in May. The bank had “actually halted issuing L/Cs to small traders”, he said.
…”We have currently stopped issuing new loans (for commodity financing) and are trying to get existing loans back. We’ve also stepped up internal supervision,” said an official at China Construction Bank, who declined to be identified because he is not allowed to speak to media.
That about sums it up for me. The Australian has a solid iron ore piece this morning that captures the dynamics of the cycle:
One of the verities of the iron ore industry that is being tested is that high-cost Chinese producers would be forced out of production first, putting an effective floor in the iron ore market of about $100 a tonne. However, much of the Chinese iron ore production is vertically integrated with smaller provincial steel mills owned by local governments. They are loathe to shut down major employers, despite orders from the Chinese central government to close small inefficient and polluting steel mills.
Pervan says the perverse response to weak prices among many Chinese miners and mills has been to maximise production to reduce marginal unit operating costs. China’s iron ore production jumped about 10 per cent last month and is now 13 per cent ahead of the same time last year.
The same production “stickiness” can be seen in Australia, with coalmines that keep producing at a loss because they are locked into take-or-pay contracts with rail freight providers. Citic Pacific’s massive Sino Iron project must be losing fantastic amounts once capital costs are included but, since they are sunk costs, the incentive is to keep producing.
…The state of the iron ore market is starting to resemble the early 1980s. From the 50s through to the mid-70s, world steel production rose rapidly in response to industrial growth in the US, Europe and Japan. There was concern that iron ore production would fail to keep pace, leading Japanese mills to foster expansions in mine capacity in the Pilbara and opening the Brazilian iron ore industry in what was at the time the very remote Amazon.
It’s worse now than then. Prices have already fallen much further from peaks and the oversupply that’s coming is much bigger. The dynamics of the cycle are clear. Steel production rises whenever margins improve then collapse again as prices fall. Iron ore prices rise and fall in sympathy as steel deflates. Each bounce is only a chance to reload shorts.
Source: www.macrobusiness.com.au
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