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On July 30, under the impact of the "hawkish" tone from the Federal Reserve meeting, the ferrous complex experienced a broad decline, with the main contract for iron ore futures falling over 3%. The author believes that the medium-term bearish trend for iron ore remains unchanged, but in the short term, there is certain support in the 700-720 yuan/tonne range, limiting further downside potential, and prices may shift into a range-bound consolidation pattern.

Medium-term bearish trend remains unchanged

Steel demand this year has shown a stable but slightly declining trend. In the first half of the year, crude steel consumption adjusted for exports was approximately 499 million tonnes, a year-on-year decrease of 3.08%, which determines that the industry is in a low-profit or even periodic loss-making pattern. At the same time, the reduction in coking coal supply has become a certainty. Iron ore, however, faces dual pressure from mine expansion and high inventory. In the first half of the year, production from the three major mainstream miners, excluding FMG, increased by 5.33% year-on-year, while iron ore inventories at 47 domestic ports rose by 18.2% year-on-year. Profit distribution along the industrial chain will further tilt towards varieties with tighter supply, and the logic for a medium-term bearish run for iron ore remains valid.

Limited room for further decline in daily hot metal output

In the past two years, iron ore has exhibited significant demand-driven pricing characteristics, with daily hot metal output serving as a core anchor for iron ore price trends. Since July, due to persistent losses, the scope of production cuts and maintenance by steel mills has continued to expand, with daily hot metal output declining for three consecutive weeks, accumulating a drop of 55,500 tonnes. Currently, among the 247 sample steel mills nationwide, only 34.63% are profitable. The phased production restrictions in the Tangshan region are still in effect, estimated to impact daily hot metal output by approximately 40,200 tonnes. In the next 1-2 weeks, daily hot metal output still has some room for a slight decline. The chart shows daily hot metal output and the proportion of profitable steel mills.

However, it is worth noting that the spot price of coke has completed two rounds of reductions, with room for an additional 2-3 rounds of cuts. Affected by the decline in coke prices, the loss margins of steel mills have narrowed somewhat. According to calculations, the latest profits for long-process rebar and hot-rolled coil are -126 yuan/tonne and -116 yuan/tonne, respectively, with the loss margins narrowing by 18 yuan/tonne and 38 yuan/tonne compared to mid-month levels. Additionally, the phased production restrictions in the Tangshan region are expected to end in early August. Based on this, the author believes that the room for further decline in daily hot metal output is limited, with the bottom likely in the range of 2.32 million to 2.35 million tonnes.

Signs of marginal contraction in supply

After the end-of-quarter ramp-up by overseas mines, supply has eased somewhat. In the first four weeks of July, the average global iron ore shipments were 32.0613 million tonnes, falling to 30.846 million tonnes in the final week, compared to an average of 34.2103 million tonnes in June. The weekly average arrivals at 47 domestic ports also fell from 26.97 million tonnes in June to 24.85 million tonnes. Combined with seasonal factors, short-term iron ore supply shows signs of marginal contraction. The chart shows global iron ore shipments.

Furthermore, steel mills have recently made minor restocking moves. As of the week ending July 24, iron ore inventories at 247 steel mills nationwide stood at 87.4 million tonnes, a sequential increase of 409,000 tonnes; the daily average port dispatches at 45 ports were 3.2378 million tonnes, a sequential increase of 336,000 tonnes. If the trend of marginal supply contraction continues, it is highly likely that port inventories will decline in the next 2-4 weeks.

Rebound in shipping freight rates

Since the beginning of this year, shipping freight rates have become one of the core variables driving iron ore price fluctuations. In the first half of the year, the fluctuation range of the Platts 62% Iron Ore Index was between $99 and $113 per tonne, a spread of about $14 per tonne. This implies that shipping freight fluctuations contributed to over 60% of the overall price movement of iron ore. Since July, crude oil prices have rebounded sharply again, and Australian shipping freight rates have rebounded by about $2.8 per tonne. Higher freight rates will, to some extent, lift the price center of iron ore. Additionally, although iron ore import profits have recovered somewhat, mainstream fines are still in a loss-making state, with profits for PB fines and BRBF at -8.8 yuan/tonne and -2.62 yuan/tonne, respectively. Persistently negative import profits will, to some extent, curb the growth of iron ore imports.

Based on the above analysis, iron ore faces pressures from mine expansion and high inventories in the medium term, and profit distribution along the industrial chain will favor varieties with tighter supply. Therefore, the medium-term bearish trend for iron ore remains unchanged. However, in the short term, the room for further decline in daily hot metal output is limited, there are signs of marginal supply contraction, and the rebound in shipping freight rates will also lift the iron ore price center. The downside potential for iron ore prices is limited, and blindly chasing short positions is not advisable.

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