Cooling Chinese demand to hit hard commodities

Cooling Chinese demand to hit hard commodities

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By Melissa Kidd

Published: July 6 2010 15:35 | Last updated: July 6 2010 15:35

A near-halving in the Baltic Dry Index since the end of May suggests that hard commodity prices will fall in the second half of the year, says Melissa Kidd at Lombard Street Research.

She acknowledges that the recent drop in the BDI – a gauge of the cost of shipping dry bulk cargoes, such as iron ore and coal – pales in comparison to a 93 per cent slump during the financial crisis. She also says it reflects to some extent an oversupply of shipping following a surge in freight prices in 2008.


“But examining underlying trends in hard commodity markets and world production suggests the BDI retains at least some of its value as a leading indicator,” she says, noting its historically close correlation with the S&P GSCI commodities index.

“China has been the world’s engine of growth for coal and iron ore, and other commodities, over the last 12 to 18 months,” says Ms Kidd.

“A cooling off in Chinese demand growth – prompted by ongoing monetary tightening – will impact heavily on global price developments. For some hard commodities, the process may already have started.

“Recent falls in the Baltic Dry Index, in combination with signs of weakening hard commodity demand in China and softening global survey data, point to a slowing down in the global recovery. Hard commodity prices will find little support going forward in this environment.”

 

Nanjing Steel Holds Off Buying Iron Ore on Price Drop (Update1)


July 7 (Bloomberg) -- Nanjing Iron & Steel Co., the Chinese steelmaker part-owned by billionaire Guo Guangchang, put off iron ore purchases and instead ran down inventories as prices of the steelmaking material decline.

Chinese steel mills have tried to resist efforts by iron- ore producers Vale SA, Rio Tinto Group and BHP Billiton Ltd. to raise contract prices, the China Iron & Steel Association said last month. Spot prices for the material delivered to China fell to the lowest in almost five months yesterday.

“We have held off iron ore purchases,” Nanjing Chairman Yang Siming said in a phone interview today. “We’re waiting to see how the market moves. No one is talking about contracts right now.”

The cost of 62 percent iron ore delivered to Tianjin port had an 11th straight drop yesterday, to $128 a metric ton. That compares with third-quarter contract prices of about $145-$150 a ton, leaving only half of contracts exercised, Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo, said in an e-mailed note today. He cited unidentified people in the industry.

It’s “difficult to say” if contracts are being defaulted on, Stavseth said by phone today.

Curbing Property Market

China’s iron ore imports fell for a second month in May amid concern construction demand may slow on government moves, including raising mortgage rates, to curb property speculation. Chinese prices for 25 millimeter rebar, steel used to reinforce concrete, have fallen 17 percent to 3,833 yuan ($565.58) a ton from a 2010 high on April 14, data from researcher Beijing Antaike Information Development Co. show.

Chinese steelmakers are likely to cut output this quarter, Xu Lejiang, chairman of Baosteel Group Corp., the country’s second-biggest mill, said on June 8. Weaker demand may prompt smaller producers to default on iron ore contracts in the period, Xu said.

More iron ore is transported at sea than any other dry-bulk commodity, accounting for 29 percent of the total, Drewry Shipping Consultants Ltd. in London estimate. Weaker Chinese demand has helped cut hire-rates for capesize ships that typically carry the material. They’ve slumped 63 percent since reaching a 2010 high on June 2.

--Helen Yuan in Shanghai. With assistance from Alistair Holloway and Jesse Riseborough in London. Editors: John Deane, Dan Weeks.

 

Steel and Iron segment is up 3% today, while S&P is up 2%. Is this a short?

 

no

 

China has a policy of giving tax incentive to steel exporters. The policy is about to phase out in 3 years. The change of policy will have profound impact on iron ore importing from over seas.