“Stockpiles at steel mills are currently at a 12-month low, whereas stockpiles at mines are hovering around 2-year highs, which points both to the tougher credit environment for struggling mills, as well as the lagging efforts in curbing output," says Georgi Slavov, Head of Basic Resources Research Group, Marex Spectron.
“As we have observed since July, a change in this dynamic can be spotted in the iron ore futures market, where the term structure has changed from persistent backwardation in the front quarters, to a market increasingly moving towards contango.
“If the market stays in contango, the attractiveness of keeping inventory increases and inversely puts downward pressure on yields gathered from having long positions in the futures market.
“The medium term indicators (in particular FAI and construction demand) are suggesting we are looking at increased downward pressure on steel product margins, further exacerbated by high production rates.
“The making of winners and losers remains highly dependent on scale benefits, including easy access to finance and storage, combined with the tough realignment of capacity in a lower growth environment.”