Commodities | Apr 21 2017
Industrial production recovery; rebound in China trade; iron ore cycle; positive outlook for base metals.
-Recovery in global industrial production augurs well for metals consumption
-Chinese copper concentrate imports the third highest on record in March
-Fundamental support for iron ore prices seen at US$50/t
-Macquarie observes strong catalysts for Metals X and OZ Minerals
By Eva Brocklehurst
Macquarie observes the recovery in global industrial production is continuing. The global car market, an indicator the broker favours for commodity-intensive economic growth, is holding up well despite weakness in China and outright contraction in the US.
Macquarie estimates global industrial production was 3.0% higher year-on-year in February, an increase on January's 2.4%. The broker notes this is a far cry from a year ago when an industrial recession was being flagged.
Deutsche Bank observes, after a quiet February, there was a strong rebound in Chinese imports and exports in March. There was a record monthly importation of oil which continues to reflect strong demand, although refined exports rebounded as well. The broker notes copper concentrate imports were the third highest on record, highlighting the country's continued preference for copper units in concentrate.
Iron ore imports have also increased to 95.6mt in March from 83.5mt in February, an increase of 14.5%. Deutsche Bank notes energy demand remains strong, with both coal and crude imports recovering. Crude oil imports increased by 22% as did coal. After a sharp fall in the prior month, aluminium semis exports and steel exports recovered sharply in March. Aluminium exports improved by around 57% and steel exports by 31%.
Macquarie believes iron ore and Chinese steel prices have retraced to more fundamentally supported levels. As an indicator of a classic pricing cycle, supply has responded to high prices and margin incentives and ultimately overwhelmed demand while re-stocking has come to an end.
Meanwhile, Chinese crude steel output surged to a record high in March, exceeding the level last seen in May 2014. The broker observes the drop in prices has not yet led to much re-balancing in terms of grade relativities. Lump premiums, meanwhile, continue to fall.
Traders that were happy to hold inventory when prices were rising have now started to sell more aggressively. Yet, with mill inventory levels still above average, Macquarie expects mills to endure further de-stocking of iron ore, which will exacerbate the weakness and potentially result in prices overshooting to the downside.
Macquarie believes the main question for the direction of iron ore prices in the near term is whether pessimism builds to a level that causes prices to overshoot on the downside, amid an aggressive de-stocking cycle, or whether underlying demand is solid enough to limit a further decline in prices.