The iron ore futures market has seen a notable rebound over the past two days. This is partly attributed to the fact that the weakening fundamentals during the off-season have largely been factored into earlier price corrections, and partly due to rising speculative sentiment from recent long-term contract negotiations between domestic and overseas miners.
Demand Pressure Eases
On the demand side, the seasonal downturn has weakened end-user consumption, with the profit margin of steel mills dropping to its lowest level this year. This has intensified pressure on mills to cut output, compounded by phased production restrictions in the Tangshan region. Hot metal output peaked in early July and has since declined consecutively, now falling below year-ago levels. Iron ore demand has correspondingly weakened alongside hot metal cuts, dragging the entire ferrous chain under a negative feedback loop. While hot metal production remains constrained by weak steel mill profitability, a recovery post-restrictions in Tangshan and the significant decline already seen suggest that further production cuts in August may be limited. Consequently, the downside pressure on iron ore demand is expected to ease markedly.
Supply Disruption Risks from Contract Talks
On the supply side, overseas miners are in an expansion phase, with cumulative year-to-date seaborne shipments increasing by about 40 million tonnes, placing significant pressure on iron ore supply. However, seasonally, July and August are typically slow shipment periods. Major miners' current shipments are at relatively low levels for the year, and non-mainstream miners' shipments have also weakened following the recent price decline. Further, market sources indicate that long-term contract negotiations between China and some overseas miners are underway. Reports suggest that certain steel mills have been notified to suspend negotiations for cargoes scheduled for September and beyond, pending the outcome of these term contract talks. Given that previous negotiations have led to prolonged restrictions on the liquidity of certain miners' products, the market is growing increasingly concerned about potential short-term supply disruptions.
Port Inventories Accumulation Slows
Domestic port inventories have seen a significant increase over the past two weeks, primarily due to the conversion of accumulated port congestion from earlier weather disruptions into stockpiles. On a marginal basis, with the rapid phase of hot metal cuts coming to an end and the potential for more typhoon disruptions ahead, the pressure on port stockpiling is easing temporarily. Still, inventory levels remain at historical highs, which will cap the upside potential for iron ore prices during the rebound.
Outlook
The overall supply-demand balance for iron ore remains loose, but there are gradual signs of improvement. On the supply front, overseas shipments are still in a seasonal slack period, with non-mainstream shipments declining as prices fall, while typhoons are causing short-term disruptions to domestic arrivals. On the demand side, steel mill profit margins remain low, but the end of phased restrictions in Tangshan brings expectations of a production recovery, halting the rapid decline in hot metal output. Additionally, ongoing long-term contract negotiations between domestic and overseas miners may temporarily disrupt the liquidity of certain grades, stoking short-term speculative interest. The sharp decline in iron ore prices earlier has already priced in the bearish off-season fundamentals. We believe that the combination of easing supply-demand pressures and news around contract talks lends some justification to the current price rebound. However, given the still loose fundamental backdrop, the rebound is likely to be limited in scope, with medium- to long-term downside risks persisting.