It has been a stormy start to the New Year despite just a few days passing since the celebrations around the world.
In financial terms at least, this year has got off to a very bad start and this could set the tone for a volatile year ahead, with US-China trade tensions, Fed Reserve action and ailing equity markets all making the wrong headlines.
Despite this bearish market sentiment, the iron ore and steel markets have defied the odds and begun with a promising start of high prices and general market optimism.
Easy credit from China’s bank
After a slump in the equity market, the People’s Bank of China (PBoC) came to a rescue with announcement of further cut of reserve requirement ratio (RRR) by 100 basis points or 1%.
According to industry sources, the RRR cut with effect on Jan 15 and Jan 25, may free up to RMB 400 billion of liquidity, boosting loans to small and micro-sized enterprises with a credit line of less than RMB 10 million or $1.46 million.
For the iron ore industry, the bank loans are expected to be made more accessible to mills and related industry to spur growth.
Infrastructure Stimulus package from Chinese Govt
Policymakers in Beijing have also unveiled infrastructure stimulus package aimed at urban rail project worth RMB 860 billion since Dec 5, 2018.
The massive stimulus package had yet to push its way into the market, but some market participants claimed that the state’s spending helped to lift confidence over steel outlook after steel prices hit a bottom in last year November.
In total, the state approved eight urban rail projects, stretching almost 7,000 kilometres of track across the provinces over the next 12 months.
US China Talks – Peace in our time?
Easing of trade tension between US and China after an extended three-day negotiation seem to raise the overall market optimism.
The ‘good wrap-up’ of the meeting boosted the depressed globally equity market, however the details of the meeting between the US and Chinese official remained sketchy for now.
A clearer picture will probably emerge with the official visit of a top Chinese trade envoy to the US later in January.
However, the goodwill gestures are expected to lift the steel market which formed the first phase of the trade war as announced by the US during first half of last year.
In the meantime, the US Federal Reserve has sent a more dovish message to the market citing flexibility in interest rate hikes in 2019 which improve the overall market sentiment over tightening credit.
Steel prices to see correction ahead
China’s steel market is likely to face a price correction in near term due to lower steel margins and high inventory among mills.
Based on some consultancy data, the restocking activities among Chinese mills have weakened and the trend is expected to continue till next week and lead to lower support to steel prices.
In addition, the country’s construction activities will remain low until March due to the winter period, adding to further softening of steel prices in Q1 2019.
Slowing iron ore imports to China
Supply of iron ore to China is expected to remain low in January, while the iron ore delivery to China is slated to drop in the month of February due to reduced construction activities over the winter period.
However, the seaborne iron ore prices may improve in February as Chinese mills prepared for increase of the construction activities that began during Spring season in March.
On the contrary, the DCE iron ore future prices are slated to soften further over the short term due to low steel demand.