• Chinese steel inventories sit well below the levels seen a year ago.
• Macquarie Bank says this will likely support steel, iron ore and coking coal prices in the near-term.
• Both Macquarie and the Commonwealth Bank expect any near-term strength in iron ore prices will likely fade in the quarters ahead.

Iron ore spot markets rose solidly on Friday, helped by strength in steel prices.

Macquarie Bank thinks there may be more of that to come, at least in the short term.

Pointing to the chart below showing total Chinese steel inventories, the bank notes they currently sit 20% below the levels seen this time last year, something it believes will help to support prices for steel and its related ingredients in the near-term.

“[We’re] short-term bullish on steel and its raw materials,” Macquarie says.

“As construction sites fire back up in Northern China, another run in rebar prices will take iron ore and metallurgical coal with it.”

While Macquarie expects the combination of low steel inventories and a pickup in demand to bolster prices in the near-term, it says any potential bounce offers an attractive level for investors to position for renewed price weakness in iron ore and coking coal.

“An opportunity to short both commodities will come up later on in Q2,” it says.

Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, shares a similar view to Macquarie, noting additional cutbacks to steel production in the Chinese city Tangshan announced last week will likely have a mixed impact on steel, iron ore and coking coal prices ahead.

“The Tangshan city government [announced] blast furnace steel mills in its jurisdiction to reduce utilisation rates 10-15% from March 16 to November 14,” he says.

“While reduced steel production in Northern China is certainly positive for steel prices, it is negative for physical iron ore consumption.

“The lower utilisation rates will likely see Chinese mills continue to target productivity, maintaining a preference for high-grade iron ore.”

Tangshan, located in the northern province of Hebei, is a major steel producing region in China.

Dhar sees the benchmark price for 62% fines sliding to $55 a tonne by the December quarter this year, down from around $79 a tonne at present.

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