In November, China’s PMIs signalled contraction, house prices fell in most cities, and inflation fell sharply. Trade, we learned over the weekend, is down down down. And as the FT notes, prices of petrochemicals, especially naphtha, are falling in a way not seen since the 2008.
And yet, as Bloomberg reports, demand for iron ore imports surged in November having plunged in October.
The country imported 64.2 million metric tons of iron ore last month, the General Customs said on its website. This is the highest since January, and compares with 49.94 million tons in October, according to data compiled by Bloomberg.
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Ore with 62 percent content at China’s Tianjin port closed unchanged at $139.4 a ton at Dec. 8, according to the Steel Index. The prices have gained 19 percent from $116.9 reached Oct. 28, the lowest level this year.
Okay, so it’s not THAT impressive, against the full-year trend:
Bloomberg cites a couple of analysts who put this down to restocking. SocGen’s Wei Yao also mentions the restocking theory, although she doesn’t sound convinced:
One plausible explanation might be the usual restocking behaviour of cashrich state-owned enterprises who took the opportunity of commodity price correction. Genuine domestic demand probably slowed more significantly than the headline imports. Inbound shipments from major capital goods suppliers, including Japan, Korea, Taiwan, and Germany, all grew much slower than in October. The challenging YoY comparison with 2010 data made it difficult to assess the exact degree of slowdown in investment goods demand.
We’re not convinced, either. Chinese data is hardly precise, but there’s pretty much nothing pointing to accelerating growth in November.
David Hynes and colleagues at Citi say it’s a little more complex than just re-stocking; and relates to the smaller Chinese mills being free of the contracts that have irked some of their larger counterparts recently:
We believe the rally was driven by some opportunistic buying by small steel mills in China. These mills buy the majority of their raw materials on the spot market, meaning that the fall in iron ore prices actually increased their margin almost immediately. This would have enabled these mills to offer a more competitively priced steel product as opposed to larger steel mills which are still being hindered by higher contract prices. At the same time, after being flooded with spot material while the price was falling, major producers finally eased back on deliveries into the spot market and thus offers dried up in early November, helping create the strong demand for spot iron ore.
This is similar to what Vale’s iron ore chief said last month — he believes there is a $120/tonne floor for iron ore shipments, below which China’s more expensive domestic iron ore producers can’t compete. When they stop producing, prices start rising again. However, Hynes et al say it appears that domestic iron ore production actually increased in October – even though prices were really crashing then.
Hynes et al think the softness will continue for a few months:
We remain unconvinced that this rally will resume any time soon. In fact, we believe prices are likely to drift lower over the next 2-3 months. Major steel mills are still cutting capacity; which has shown up in the latest steel production figures issued by China’s CISA showing that daily production in early November was 1.66Mt per day, equivalent to ~600Mtpy (Figure 3). Inventories are also at health levels. Iron ore inventories at the ports have been steadily increasing all year. But the recent increase correlates with the bounce in prices in October, suggesting that some of this buying has not been for immediate consumption (Figure 4). At the steel mills, inventory of rebar and hot rolled coil are at relatively comfortable levels, despite having fallen from historical levels seen earlier this year (Figure 5).
Those inventories are indeed pretty high:
Citi actually predicts a price rally from either restocking or demand recovery by Q2, 2012. But longer term, they say China’s demand will will plateau around 2012, the end of the 12th five-year plan:
Longer term we remain convinced that China has reached peak capacity and that as economic growth begins to slow, steel output will revert to a more sustainable level. Our analysis of US steel production from the 1960s to date tells us that US needs only half of its peak capacity, with the country moving to a post-development phase. We envisage peak production for China by the end of the 12th FY at around 850 Mt. Thus we calculate that China will only require about 425 Mt of steel capacity for the long term
China’s steel capacity for this year is forecast to be 789mt. By contrast, in 2006 it was 470mt, i.e. the next five years will see steel capacity grow far more slowly. Citi also assume that China’s social housing programme is progressing at target speed to add 10m units in both 2011 and 2012 — something that may or may not be happening.
Well, there’s always India…
Related links:
China November iron ore jumps 29% on stocking – Bloomberg
Steeling for more commodities volatility – FT Alphaville