Reports of a third month of record Chinese iron ore imports seems to add to evidence from a rising manufacturing index, rebounding steel prices and a spike in freight rates that China is back as the main driver for a commodities rally.
The trouble is many analysts don't believe it will last, even as more of Beijing's nearly USD 600 billion stimulus plan takes effect. The continued decline in power consumption, high iron ore inventory levels and weak overseas steel demand suggests that trade statistics and freight rates may be as misleading now as they were three months ago when the financial world last looked at the steel industry as the canary in China's industrial mine.
Far from reflecting rising demand, they say the surge of iron ore imports could be the result of cost-competitive global miners taking market share from high cost Chinese miners. But this trend could lead to its own undoing as rising freight costs make imports less attractive, while record ore stocks sitting at Chinese ports suggest traders' rush to restock hasn't been matched by robust growth in steel output.
Deutsche Bank analysts said "We find this trend is perplexing given Chinese steel exports fell 60% in March. Similarly the domestic market does not show any sign of a turnaround and China may have an oversupply of more than 100 million tonnes of crude steel this year."
Mr Roger Downey Credit Suisse analyst said "The question now is how sustainable this is. We expect the displacement of domestic ores to decelerate, given that seaborne suppliers will be less keen to lower prices further. China's iron ore inventory at ports jumped to a record 74.7 million tonnes in April, and on top of that, research firm World Steel Dynamics estimates there is a further 20 million tonnes of iron ore stocks at steel mills.”
In other words, Chinese iron ore buying spree could also taper off given prospects of lower steel output and consumption in the world's biggest producer.
Source: Steel Guru/Reuters
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