China official manufacturing purchasing manager’s index (PMI) has reached a five and a half year high at 52.4 rating in September, as compared to 51.7 in August. The official PMI showed that the Chinese factories have grown at the fastest paces since 2012, due to new orders and improved output prices.
The high PMI rating indicated that the high manufacturers’ margins enjoyed by Chinese factories which benefited from a stimulus on infrastructures spending, higher exports prices and a red-hot property market. The official PMI often covers China’s state owned enterprises (SOEs) performance over the month as compared to Caixin PMI which focuses more on the private enterprises.
In contrast to high official PMI, the China’s Caixin PMI for September dropped by 0.6 month-on-month to 51.0, down from a previous six-month high reading in August. The latest PMI showed an overall weaker private manufacturing performance during the month due to higher input costs and production costs, which lowered private manufacturers’ profitability.
Bear market for iron ore. Despite the spectacular performance seen in the PMI, Morgan Stanley predicted a bearish market for the commodity going forward. According to the investment bank, the commodity has recorded its biggest loss in 16 months recently due to the output cut imposed by the Chinese authority. As such, the spot iron ore prices have fallen to USD60-65/mt level almost in line with Morgan Stanley earlier price expectation.
Based on the Morgan Stanley assessment, the spot iron ore prices with 62% ferrous content in Qingdao have lost more than 20% since peaking near USD80/mt in August, meeting the common definition of a bear market. Lower-grade of 58% ore, which trades at a discount, has also plunged into the USD 30s. So far, the bank noted that the commodity has peaked twice this year at February, then June till August before price corrections set in.
Over 1000 of mining rights to be wiped out in China. China will terminate one third of its existing iron ore mining license or over 1,000 mining rights to improve air quality in cities. According to the Metallurgical Mines’ Association of China, the policy aims at shutting down small polluting mines that scattered across the country.
For them to operate again, the small miners will need to comply with environmental regulations and upgrade their production processes to reduce harmful emission. Furthermore, the mining processes within natural reserves will also be forced to close down for environmental protections.
However, the impact of this ruling may not be felt greatly in the industry, as some traders noted that many China-based mines have already been closed. They believed that this ruling was just confirming the fact and prevent the smaller polluting mines from restart till they complied with environmental regulations. Apparently, China will implement further output cuts in other areas even after the golden week holidays and probably throughout the winter period to cut air pollutions.
HKEx to feature iron ore futures in November. Hong Kong Exchange (HKEx) planned to introduce iron ore futures on November to compete with US and other regional exchanges. So far, HKEx did not set a particular date for the launch but informed that timeline will be in November, subjected to market readiness.
This will be the first ferrous metal product introduced by HKEx and it is in-line with other existing precious and base metals products that the exchange offers.
“With the benefits of electronic trading, our planned Iron Ore Futures will provide a transparent and efficient risk management and investment tool for physical and financial users who want to hedge their price risk or gain exposure in iron ore,” said Li Gang, the HKEx’s co-head of market development.
SGX posts record-breaking volumes in lump futures. Singapore Exchange (SGX) saw its iron ore lump premium futures volumes increased by 30% month-on-month to 32,000 lots during the month of September. The record-breaking gains were also companied by 305% increase in its open interests to 32,500 lots.
The drive for high traded lump futures was attributed to stricter Chinese environmental protection policies which aimed at cutting harmful emissions from steel mills. Thus, the China-based steel mills need to comply with sintering production cuts and increased their usage of iron ore lumps or pellets.
The historical average for SGX lump premiums has been +12% over the SGX 62% iron ore benchmark contract with lows of +1.36% last seen back in April 2017. Currently, the market is trading at the top of the range at 25% which may show that current levels are over-bought however given the fundamental dynamics of the market and the regulatory changes the market could be breaking into a new trading band.
Slow activity for coking coals over golden week. Little activities were seen in coking coal market amid holidays in Asia, however a firm offer was heard on Monday for 75,000 mt of semi-premium blend with 67%-69% coke strength after reaction (CSR) or similar coal at $184/mt FOB Australia, for November laycan.
Other than that, no much offers were heard in the market and one Asian trader proposed that bid for a premium low-vol with 71%-73% CSR cargo should be no higher than USD158/mt FOB Australia.
In the meantime, Indian coking coal buyers may bid around USD176/mt FOB Australia for semi-premium blend with 67%-69% CSR amid the Golden week holiday. Besides India, buying interest remained low in the FOB market. The Chinese buyers may do so only after the week-long holiday as they seek clarity on the pollution controls.
After the holidays, the Chinese traders may be keen to import due to the lower seaborne prices as compared to higher domestic coals pricing. Moreover, coking coal supply disruptions in Shanxi and Mongolia will prompt the Chinese traders to rely more on imports to stabilize their inventory.
The market virtually came to a standstill as holidays loomed over Asia. Expected little market activities this week and this period is much like the “Sitzkrieg” or sitting war in WWII. Where traders took a break in some retreats to plan for their market positions ahead. After the golden week holidays in China, the market expects production cuts and stricter environmental ruling to play a huge role in determining market movement. For now, it is all calm on the fronts and happy holidays to all.