Concerns about a slowdown in China as a result of the government’s deleveraging campaign and the US/China trade tensions have weighed on most cyclical metals this year.

Supported by strong domestic demand, steel remained the most resilient but has started to soften as of late. Prices of reinforcing bars, which are used in construction, are down 10 percent from their yearly high, reached at the beginning of this month, reflecting signs of a slowdown in the real estate market.

Property sales were down for a second consecutive month in October while growth in property starts has halved since summer.

Softness in steel prices has not, however, fed through into the iron ore market, where benchmark prices hover around $70 per tonne.

Most steel mills’ margins have contracted as a result, falling from more than $150 per tonne on average to almost zero.

Steel production, which has been running on record levels for most of this year, should come down and weigh on the mills demand for iron ore.

Furthermore, parts of China’s steel industry are facing heating season capacity cuts in order to improve air quality. As these cuts are regionally targeted rather than centrally ordered, it is difficult to assess their impact in advance.

The impact on iron ore demand should be negative, supporting our assessment of an oversupplied market and our expectation of falling prices.

That said, we increase our three- and twelve-month price targets to $65 and $60 per tonne while maintaining a cautious view.

Amid emerging signs of a slowdown in the real estate market, Chinese steel prices started to soften.

Lower steel production as a result of contracting margins and the heating season capacity cuts should weigh on iron ore demand.

We still see an oversupplied market, maintain a cautious view but increase our price targets.

Any opinions expressed here are the author’s own.

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