China has started restocking the raw materials before winters. Iron ore and coking coal gain momentum in the buying spree.
We are now at the start of China’s seasonal Q4 iron ore restocking event, which begins after the National Holiday. The steel industry and its traders are now engaging the seaborne trade, ahead of CYH1’s massive lift in steel production rates (Time to Accumulate, 22-Jul-10) – and before it becomes too difficult to transport raw materials in winter.
Iron ore spot prices have, in fact, already lifted since mid-Sep – reflectingChina’s pre-National holiday restocking. The industry usually carries out modest restocking prior to major holidays (Chinese New Year & National Day). But this spot price lift is likely to continue through Q4, in response to the industry’s seasonal Q4 restock event.
Generally, China has three quiet trading months that offer short-term upside foriron ore equities: Jan-Feb (Chinese New Year), May (holidays + H1’s restock terminus) & October (National holiday; start of Q4 restock). So we’d say now is a good time to consider iron ore
China’s landed iron ore prices (premium grades, 63-65% Fe) are up 5-6% over the last 4 weeks, now at US$156/t cfr. What is the likely upside? Another 25% would take us back to Apr-10’s peak levels. Australian & Brazilian fob prices are higher by a similar magnitude, because drybulk freight rates have remain unchanged over this period (Aust-China US$10-12/t; Braz-China US$26-30/t).
Source: UBS Securities
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