A perspective recently caught my attention, suggesting that the black metal sector might be on the verge of a major price surge.

The rationale is rather straightforward: the current production levels and inventories of rebar and hot-rolled steel are not just low but at historically minimal levels.

Why is this happening? It appears that there is a consensus regarding future demand expectations, leading producers to minimize their inventories; the more they produce, the more they risk incurring losses.

In such a scenario, if demand suddenly spikes and supply remains constrained, we could see a dramatic price surge.

So, is this line of reasoning sound?

1. The Collapse of Black Metals: Dispel the Fantasy

That’s quite accurate! This indeed represents a classic pattern of a market rally; with low inventories, slim profit margins, and reduced production, a turnaround in demand expectations can quite possibly trigger a reversal in trends.

For example, back in mid-2023, market expectations were that Yuanxing would come online, perfectly coinciding with the Silicon Valley Bank crisis which produced poor macroeconomic expectations, causing the futures of soda ash to plummet to 1500.

Yet, when Yuanxing postponed its launch, it inadvertently ignited a soda ash market rally

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However, unlike the current steel market, the demand for soda ash at that time was robust; it was solely the reversal of supply expectations that caused a mismatch between supply and demand.

Similarly, if the government were to suddenly announce an increased push for infrastructure development, or if rumors surfaced regarding plans to utilize several trillion to purchase existing residential properties at a discount, it would influence market sentiments significantly.

Some individuals might interpret these government policies as fuel for bullish market sentiments, carried by phrases like “proactive macro policies” and “moderately loose monetary policies.” For the bulls, such statements translate to “let’s invest in real estate.” However, they neglect another critical phrase: “optimizing existing stock while strictly controlling new additions.”

With the population dwindling, who exactly would even buy all these houses? The newborn population in 2023 was merely 9.02 million

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Can the elderly in rural areas just move to cities to boost urbanization? Even if they wanted to buy, would they have the financial capacity?

Recently, I came across some intriguing data from Steel Union worth ponderingThe per capita steel accumulation (commonly referred to as “social steel accumulation”) indicates how much steel a country possesses in total per individualA higher accumulation per capita implies a more developed country with better construction.

When the United States peaked, its per capita steel accumulation hit 8.8 tons, the UK at 7.6 tons, Japan stabilized around 10.5 tons, and Korea reached 9.5 tons as a result of completing industrialization.

Now, can anyone guess China's figure? In 2023, it had already surged to a staggering 8.9 tons! This is crucial data regarding existing stocks, not new growth! With a population of 1.4 billion, does that not indicate an unsustainable situation?

Many often make the critical error of getting bogged down in the details, fixating on balance sheets and inventories

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Is that perspective correct? Yes! The information might be valid, sometimes even insider knowledge, yet the outcome can be a total lossHere, I would like to borrow a line from the late Prime Minister Zhu Rongji:

“Currently, some are calculating how many planes, ships, and missiles China possesses, concluding that the Chinese dare not fight nor know how to fightAccording to that logic, Hitler would have already ruled the world!” You do not understand Chinese history; you do not know that the Chinese people are willing to defend their country's unity and national dignity with blood and life.”

Likewise, if one looks solely at the last two years in isolation, failing to consider the broader historical context from China's reform and opening up to globalization in the 1980s, you will never grasp the fixed asset investment cycle and will remain trapped in fantasies.

In every investment scenario, it’s imperative to first focus on the larger direction and macro-cycles before fine-tuning actions within the smaller cycles; going against the overarching trend rarely yields good results.

However, absolute certainty is a myth

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One must question why steel production is declining, and if coking coal prices are plummeting while iron ore stays robust.

2. The Fall of Coking Coal: Why is Iron Ore Thriving?

We referenced an intriguing piece of data:

According to the General Administration of Customs, iron ore imports for 2024 are projected to increase by 4.9% compared to the previous year, amounting to around 58.15 million tons.

In tandem, the daily average pig iron production for 2024 is expected to reduce by about 100,000 tons, leading to a decrease in steel production as well

In the January to November period of 2024, China’s crude steel production reached 92.919 million tons, a decrease of 2.7%.

Amidst this backdrop of declining steel production, it’s natural for the demand for coking coal and coke to diminish, resulting in falling pricesYet, the demand for iron ore remains surprisingly good, with about 60 million tons of iron ore disappearing from the marketWhy is that?

Coking coal and coke supplies are relatively consolidated, leading to intense market competitionIn 2023, production was curtailed due to environmental regulations, but capacity is set to be released in 2024, overlapping with weakening demand, which has severely impacted this particular sector.

Conversely, regarding iron ore, the majority of steel mills utilize imported ore, which is primarily controlled by foreign mining giants

This leaves domestic players with little bargaining powerMoreover, there haven’t been prominent signs of production cuts or reductions among domestic steel mills, which have even increased their iron ore stocks.

Facing a decline in demand, steel mills have adopted different strategies by aggressively lowering stocks of coke and coking coal, as they hold bargaining power in that areaHowever, with iron ore, there's a susceptibility to habitual thinking, prompting them to impulsively purchase whenever there's a price drop, as these materials do not incur significant storage costs.

This situation presents a double-edged sword; a stable demand can support iron ore prices, but once demand experiences a vacuum, excess iron ore inventory can become a catalyst for price declines.

Historically, over the past decade, the iron ore market's trajectory can be divided into five significant phases: (1) 2013-2015 saw concentrated iron ore supply amidst slowing demand; (2) 2016-2018 experienced structural reforms on the supply side with stricter environmental limitations; (3) the 2019 Vale mining disaster and Australian cyclones drastically reduced supply; (4) following the pandemic in 2020, demand surged beyond expectations; (5) since 2021, policies aimed at "reducing crude steel production" have been introduced.

Among these five phases, demand has proven to be the most significant influencer of iron ore prices, with supply generally remaining relatively stable, barring extreme circumstances like 2015. The leverage of the supply side on iron ore prices is markedly weaker than that of demand, except when faced with unexpected events such as mining disasters

Inventory does not directly determine market trends but can augment or suppress them.

3. When to Enter the Market?

Recently, several factors have been driving the rise in iron ore prices:

(1) Macro Factors: Broadly, the market is anticipating specific policies for the coming yearCoupled with improving conditions in the U.S- with inflation decreasing and employment remaining stable - expectations for domestic stimulus policies are amplifyingGiven the low inventories of steel, there’s a heightened sensitivity to positive news across the entire commodities sector.

(2) Shipment Volumes: The most recent data shows a decrease in global iron ore shipments by 2.965 million tons to 28.156 million tons

Additionally, the volume of imported ores arriving has declined, with data from Mystee showing a total of 24.416 million tons across 47 ports in China, a reduction of 5.027 million tons compared to previously.

(3) Crude Oil: Recent surges in crude oil prices have contributed to expectations of rising costs across the board.

However, I perceive these developments as lacking strong sustainabilityNevertheless, the upcoming holiday season can significantly influence market sentimentsThe demand primarily hinges on domestic needs; the influence from other countries remains minimal.

As for when to short the market? I’ve already made some short trades and set stop-losses but can only assess the current prices for potential testing

I cannot predict when the rebound will peak; anyone claiming certainty is likely misleading

However, given the current macro environment and without significant policy shifts, maintaining prices above 800 seems increasingly challengingUnless there is an upsurge in downstream demand, I suspect upward movement will be difficult.

Some analysts prefer technical indicators to identify turning points, while others rely on newsflowWhat works for others may not suit your strategy

Still, let me reiterate that understanding market trends alone will not contribute to profits; managing risks is the core of successful trading.