Why iron ore prices fell
The change in steel production and daily average molten iron production can be relatively intuitive to see the change in the demand for iron ore in steel mills, according to the latest data released by national statistics, in July 2021, China's crude steel output was 86.79 million tons, down 8.4% year-on-year; the average daily output of crude steel in July was 2.799 million tons, down 10.5% month-on-month; from January to July, China's crude steel output was 649.33 million tons, an increase of 8.0% year-on-year. China's pig iron output was 72.85 million tons, down 8.9% year-on-year; the average daily output of pig iron in July was 2.350 million tons, down 6.9% month-on-month; from January to July, China's pig iron output was 533.5 million tons, an increase of 2.3% year-on-year. In July 2021, China's steel output was 111 million tons, down 6.6% year-on-year; the average daily output of steel in July was 3.581 million tons, down 11% month-on-month; from January to July, China's steel output was 809.02 million tons, an increase of 10.5% year-on-year. From the above data, it can be clearly seen that in July, my crude steel and pig iron production fell sharply year-on-year and month-on-month, and crude steel production was already a new low in the year. The reasons for such a significant decline in steel production are mainly the following points. First of all, since July, policies to reduce crude steel production have been introduced throughout the country, and steel mills around the country have begun to strictly implement the measures to stop production and limit production, and there is no sign of relaxation. Crude steel production cuts are expected to materialize gradually. Secondly, the market is in the off-season of steel consumption, coupled with the heavy rainfall disturbance caused by the epidemic and typhoon, the downstream demand of the industry is relatively weak, and the apparent demand is at a very low level in the same period of history. Finally, this year's domestic coal supply is tight, there is a serious shortage of power resources in various places, Guangxi, Guangdong, Sichuan, Yunnan and other places have different degrees of power curtailment behavior, the local electric furnace factory was forced to cut power and stop production, which caused a certain impact on steel mill production.
Looking at the average daily molten iron production, it can be seen from Figure 2 that it began to decline from 2.357 million tons on July 12, and fell all the way to 2.2863 million tons, a decrease of nearly 3%. Except for the week of the centennial party celebration on July 1, due to the sharp decline in molten iron production caused by the policy-oriented steel mill production restrictions, the current average daily molten iron production level is at an absolute low level during the year.
From January to July this year, China imported 650 million tons of iron ore, compared with 660 million tons in the same period last year, and counting the domestic ore production, the supply of iron ore in the first half of this year was slightly higher than last year, basically flat at the same level last year. The supply side of iron ore remains at a high level, and due to the gradual implementation of the domestic policy of compressing crude steel production, there has been a more obvious decline in steel and daily molten iron production since July, indicating that domestic demand is weakening, and overseas demand is likely to peak and fall. The continued weakening of iron ore fundamentals, coupled with the panic of traders in the spot market, the resonance of iron ore spot prices and disk prices fell.
Figure 1: Crude steel and pig iron production in 2021
Figure 2: Average daily molten iron production
After-market market research
Since July 21, iron ore prices have fallen continuously, and intraday prices have fallen by more than 20%. At present, the decline in intraday prices is larger, and the risk of chasing short again is far greater than the return. And on Friday, the output of large varieties of steel began to pick up, and the apparent demand has increased, but the apparent demand for rebar is at a low level in the same period of history, compared with the apparent demand data of rebar plates, the hot coil table needs to be at a historical medium level, and the cold-rolled, medium-thick plate table needs to be higher than the same period in previous years. Overall, the steel data has shown signs of improvement, the current market is still in the off-season, the peak season has not yet arrived. This week, the average daily molten iron production also stabilized and rebounded, which is the first increase in nearly a month, although the increase is not much, but it can be seen that there are signs of improvement. With the gradual approaching of the peak season for finished timber, the average daily molten iron production is expected to recover. We believe that there is a high probability that all parts of the country will not start to implement a stricter policy of reducing crude steel production in the third quarter, and the greater probability will be implemented in the fourth quarter. Because the third quarter is the seasonal peak season of finished products, with the weakening of the impact of the rainy season, high temperature and other factors, the arrival of the golden nine silver ten, the demand for rebar is expected to improve month-on-month and the downstream demand of the hot coil itself is not affected by the seasonality, mainly stable. In the fourth quarter, China has a heating season environmental protection limit in previous years, and then the policy of superimposing domestic crude steel production is relatively more reasonable. And we consider that this year's Chinese New Year's Eve is on January 31, 2022, and we do not rule out that steel mills may take an early holiday.
From January to July, the national real estate development investment was 8,489.5 billion yuan, an increase of 12.7% year-on-year; the sales area of commercial housing was 101648 million square meters, an increase of 21.5%; the area of new housing starts was 118948 million square meters, down 0.9%; the housing construction area of real estate development enterprises was 8,918.8 million square meters, an increase of 9.0% year-on-year; and the area of housing completions was 417.82 million square meters, an increase of 25.7%. Real estate in July. Judging from the above data, the front-end of real estate is slightly better than the severely restricted back-end performance. Since the beginning of this year, China's implementation of three red lines and centralized land supply policies has had a greater impact on real estate enterprises. Real estate developers are forced to deleverage, the willingness to take land is extremely low, in order to return cash flow also need to increase promotions, and this year real estate companies because of the three red line policy has been difficult to get loans from the bank, can only borrow more than 15% of loans from various channels. This year, the national real estate industry has become stricter in regulation and control, strictly abide by housing and not speculation, and the real estate data has declined significantly. Under the sub-tone, it is expected that the real estate data will be difficult to improve in the future, and the real estate weakening in the second half of the year is expected to be stronger. In the first half of this year, due to the control of the epidemic, the issuance progress of local special bonds is lower than in the previous two years, although the recent state issued this year's local special bonds in advance, concentrated in September, but when this wave of funds effectively affects the entity enterprises or there is a certain delay, or reflected in the obvious first quarter, this year's infrastructure investment may be difficult to have a significant improvement.
In summary, in the short term, we believe that the iron ore disk price fell by a large margin, basically has fully reflected the pessimistic expectations of the market, and last week's fundamental data has signs of stabilization and improvement, with the arrival of the downstream demand season, you can consider doing more at a low price (you can refer to the recovery of daily average molten iron production); in the medium and long term, the supply of iron ore in the first half of this year is still incremental, overseas mines are concentrated in the second half of the year, it is expected that the supply will be loose throughout the year, the overall increase is extremely impressive, and the current domestic economy is expected to weaken, Real estate and infrastructure is difficult to form a strong support for iron ore demand, while overseas demand data has also peaked and declined, it is recommended that the second half of the year be treated short (specific point range can refer to our iron ore weekly report).
Figure 3: Overseas pig iron production
Figure 4: Real estate data
This article originates from the Minmetals Futures microservice