Iron Ore Bounces: Prices Above Contract Average While MOI for May 2020 Remains the Highest

  • Mar 04, 2020 AEDT
  • Team Kalkine
Iron Ore Bounces: Prices Above Contract Average While MOI for May 2020 Remains the Highest

Iron ore prices recently have shown a sharp rebound or pullback in a weaker market, and market participants & research houses believe the resilient steel prices to be the reason, which has somewhat improved the operating margins of steel manufacturers. Additionally, some market participants are of the view that with lower PMI number reported, any stimulus could augur well for steel and iron ore consumption in the near term.

In China, the Dalian Iron ore futures (May 2020 DCIOK0), the highly active contract by volume surging from RMB 606.0 (intraday low on 28 February 2020) to the present high of RMB 666.0 (as on 3 March 2020 2:28 PM AEDT), which marked a gain of ~ 9.90 per cent.

While the demand is restoring, the supply chain is somewhat feeling pressure, inferred from the deliveries of 111.68 million metric tonnes across the 35 significant Chinese ports (as on 28 February 2020), which remained ~ 1.56 million metric tonnes down against the week ago, reflecting third consecutive decline,  and over 21 million metric tonnes against the previous corresponding period.

The daily average deliveries from these 35 ports are assessed by some research houses to be surging by 135,000 metric tonnes (as on 28 February 2020) against a week ago to stand at 2.73 million metric tonnes.

The higher deliveries were mainly led by the Tangshan provinces, which had been assessed to contribute 30 per cent in the deliveries.

The disturbance in the demand and supply dynamics might have caused a pullback in iron ore prices, but the mechanism remains somewhat broader.

What’s Ahead?

Steel inventories across China have been surmounting in the wake of lower economic activities across China due to the coronavirus outbreak. The manufacturing and non-manufacturing activities in China for February plunged, reflected by the drop in CFLP Manufacturing and Non-Manufacturing PMI. As per the data from CFLP,  the Manufacturing PMI fell below the mean of 50.0 to stand at just 35.7, and the Non-Manufacturing PMI fell even lower to stand at 29.6.

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The reading across both the PMIs remained well below the market consensus and their previous value, reflecting higher than the anticipated impact of the coronavirus outbreak on the economic activity across China.

The Caixin Manufacturing PMI also fell drastically to stand at 40.3 for February, down against the market anticipation of 46.1 and its previous reading of 51.1.

While the steel inventory across China are piling up drastically, more and more mills are undergoing maintenance, which could now put pressure on iron ore demand. Apart from that, the Tangshan in Hebei provinces has issued a pollution control plan for March 2020, which is likely to reduce the demand for iron ore ahead.

As per the recent plan for March 2020, the A and B-graded steelmakers could continue the production, whereas, the C-graded mills are required to cut capacity of their sintering and pelletising machines by minimum 50 per cent.

The new plan is likely to reduce the downstream steel demand, which coupled with a large inventory and higher number of mills under maintenance might put pressure on the iron ore demand ahead.

However, the higher steel margins or operating margins for steel mills in the wake of rising steel prices could prompt the allowed mills to surge production to lock in the future sales, which could be a considerable risk factor for the short-sellers, while a supporting factor for the longs.

The Steel Rebar futures (near-month) on the London Metal Exchange (or LME) rebounded sharply from  its recent low of USD 407 a tonne (close on 6 February 2020) to the present high of USD 430 a tonne (close on 2 March 2020), marking a price appreciation of ~ 5.65 per cent.

 

Steel Rebar Near Future Daily Chart

Steel Rebar Near Future Daily Chart (Source: LME)

 

Open Interest Along May 2020 Contracts (Iron ore and Steel)

The open interest for the May 2020 expiry iron ore futures remained 739,470 (as on 3 March 2019), highest among all the expiries, which could be further combined with the LME monthly report, which suggested that the May 2020 contracts of steel hold the highest end of month market open interest (MOI).

 

End of Month MOI and Settlement Price

End of Month MOI and Settlement Price (for January 2020) (Source: LME)

 

The high open interest along the May series of both the iron ore and steel rebar could suggest that the market anticipates higher demand during May 2020 in the prevailing scenario.

Impact Across ASX-listed Iron Ore Mining Companies

The iron ore miners are finally taking a breather after a brief plunge in prices, which took many iron ore stocks across the exchange significantly down from their recent top, amid a pullback in iron ore prices.

Post plunging by over 23 per cent from its recent top of $41.47 (intraday high on 22 January 2020) to trade at a low of $31.88 (as on 2 March 2020). The stock is demonstrating a pullback in prices with the price reaching an intraday high of $34.47 (as on 3 March 2020), up by 8.12 per cent from yesterday’s low.

Likewise, many other ASX-listed iron ore stocks are showing the same price behaviour with different magnitude of price change. Stocks such as Fortescue Metals Group Limited (ASX:FMG), Rio Tinto Limited (ASX:RIO), South32 Limited (ASX:S32), and many others are showing the same price behaviour.

What Are Chartist Looking At?

  • Iron Ore on a Daily Chart

 

DCIOK0 Daily Chart

DCIOK0 Daily Chart (Source: Thomson Reuters)

 

On the daily chart, iron ore May 2020 futures prices are trading above the contract average price of RMB 658.5 with a slight spread between the 9-day exponential moving average and 21-day exponential moving average (EMA), reflecting slight interest from the buyers.

The increase in prices are well supported by the increase in volumes, and now the further movement would be largely dictated by the availability of the long side to keep the prices well above the contract average, which could act as immediate support.

Investors should closely monitor the price around the contract average and the spread between the 9-day EMA and 21-day EMA, as a sustain above the contract average price along with an increased spread might attract buyers, technically, while a break below and sustain below the average price with narrow gap or a negative crossover between the 9-day EMA and 21-day EMA, could attract sellers ahead.


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