Iron Ore: Supply shrinks, and steel consumption will become the baton for the trend in 2022.
In 2021, domestic iron ore futures and spot prices experienced sharp fluctuations. In the first half of the year, under the strong domestic and overseas demand, the iron futures in May rose to 1,358 yuan/ton, a record high in the eight years since listing. The Platts spot price simultaneously hit a record high of 233.1 US dollars/ton. The price of 61.5% PB fines at Jingtang Port rose from RMB 1,230/ton at the beginning of the year to RMB 1,625/ton, the highest in early May, an increase of more than 32%. In the second half of the year, under the double blow of the national crude steel production restriction policy and the collapse of real estate consumption, the price of iron ore collapsed. The lowest price of Platts was 87.2 US dollars/ton, and 61.5% PB fines of Jingtang Port was 610 yuan/ton on November 23.
Supply side: According to the global shipping volume data of the Steel Union, the cumulative global shipping volume from January to November was 1.479 billion tons, an increase of 52.06 million tons year-on-year. Australia shipped a total of 842 million tons, basically the same as last year. Brazil shipped a total of 328 million tons, an increase of 19.22 million tons from last year. Non-mainstream shipments totaled 310 million tons, an increase of 30+ million tons compared with last year. The increase in iron ore shipments was basically in the first half of the year. The cumulative output of domestically produced mines from January to October was 222 million tons, a cumulative year-on-year decrease of 0.6%.
Demand side: overseas demand has slowed down, and domestic demand has fallen sharply. With the decline in overseas crude steel production and sales, overseas total iron output showed a continuous downward trend after peaking in March. In October, overseas total iron output was 46.95 million tons, an increase of 6.31% year-on-year, and the growth rate was further reduced. Domestic demand: Affected by the domestic policy of suppressing production and the decline in consumption, domestic pig iron production fell by 6.16% year-on-year from January to October, and China's iron ore demand has fallen sharply. China's annual pig iron output is expected to be 827 million tons in 2021, a year-on-year decrease of 7.6%. The sharp drop in Chinese demand has caused iron ore prices to fall precipitously.
In terms of inventory: steel mills and ports have diversified inventory, and the overall inventory has reached a historical high level over the same period. This year, the inventory of 45 ports closely follow the domestic crude steel production restriction policy, showing a pattern of low before and high afterwards. In the first half of the year, it remained at around 120 million tons, and its performance remained stable and changed little. In the second half of the year, after the average daily molten iron decreased significantly, the inventory continued to accumulate to a historical high of 150 million tons over the same period. The trend of steel mill inventories and port inventories is exactly the opposite, showing a pattern of high before and then low. In the first half of the year, due to the high level of pig iron production, steel mills actively replenish inventory, which kept the inventory high. In the second half of the year, pig iron production dropped sharply, and iron ore prices plummeted. The northern region was also affected by environmental protection restrictions in autumn and winter and the Winter Olympics, which led to the continued low willingness of steel mills to purchase sinter.
Looking forward to 2022, on the supply side, the four major mines will increase, while non-mainstream mines need to pay attention to prices. With the sharp drop in the price of iron ore, the four major mines have successively revised down their output in different ranges this year. Looking forward to next year, Vale is expected to increase its production by 15 million tons, Rio Tinto by 10 million tons, FMG by 5 million tons, BHP Billiton by 2 million tons. The combined output of the four major mines will increase by 32 million tons year-on-year. For non-mainstream mines, due to the scattered distribution of non-mainstream mines, the volume is small, and the cost generally varies greatly. Coupled with the epidemic and changes in demand that have led to increased volatility in ocean freight costs this year, non-mainstream mines have become the easiest subject to be forced to reduce production in the process of falling iron ore prices. According to the calculation of the CRU global iron ore shipping cost and domestic ore cost curve, when the Platts price drops from 140 US dollars/ton to 80 US dollars/ton, it will cause non-mainstream mines such as India and Russia to touch the production cost line. This will trigger a reduction in production, which will be about 90 million tons. When the Platts price drops from US$80/ton to US$60/ton, it will trigger a reduction in output in non-mainstream mines such as Australia, reducing output by about 80 million tons. When the price fell to $60, it was already close to the cost of FMG.
In terms of demand, overseas demand peaked and then declined, while domestic demand was determined by the real estate industry. In 2021, the overseas steel industry is in a period of economic recovery after the epidemic, and demand for iron ore is strong. Looking forward to 2022, the overseas steel industry has been close to full production after the resumption of production this year, especially in Europe and the United States, where the upper part is restricted by capacity bottlenecks, and there is insufficient room for subsequent production increases. At the same time, the epidemic is still continuously impacting overseas industrial production. It is expected that overseas iron ore demand for the whole year of next year will drop by 17 million tons or 1.9% year-on-year.
Domestic: (1) From the current point of view, in the context of the sharp decline in various real estate industry data, the real estate industry is expected to improve marginally, and domestic steel consumption next year is not optimistic. Under these conditions, considering the slowdown in overseas demand, it is expected that iron ore port inventories will accumulate to a high level in the first half of the year, while domestic demand will rebound rapidly in the second half of the year, resulting in a decline in domestic port inventory, and iron ore inventories will maintain a slight positive growth throughout the year. (2) If the country has high demand for economic growth next year, it will inevitably increase the stimulus policies for the real estate industry. Under these conditions, due to the high base in the first half of 2021, iron ore consumption in the first half of next year will still fall sharply year-on-year, but the decline has been significantly narrowed. The high point of iron ore port inventory will appear in March next year. Subsequently, there will be a continuous de-stocking trend, and it is expected that the domestic port iron ore inventory will decline to a certain extent in 2022.
Rubber: The supply growth rate drops, and the bottom of the price may move up.
Combined with the current low car inventory, with the ease of chips, the production side will further increase. In the next year, China will be more inclined to use infrastructure to boost the economy. We expect that the domestic supporting and replacement markets are expected to improve in 2022. With the gradual withdrawal of the overseas monetary easing policy in 2022 and the improvement of the epidemic situation, it is expected that domestic tire exports will return to before the epidemic, and the high-prosperity tire export demand will gradually decline.
From the perspective of upstream and processing end, the current valuation of rubber is not low, at an intermediate level. In 2022, the global natural rubber may show a pattern of rising supply and demand, but the supply growth rate is in a downward stage. On the demand side, due to the slow process of overseas loose exit policies and the possibility of domestic macroeconomic policies supporting the economy, global supply is expected to approach the growth rate of demand in 2021. This may bring about a further improvement in the global rubber supply and demand pattern in 2022, supporting the bottom of rubber prices to continue to rise.
In terms of rhythm, focus on the turning point of domestic structural contradictions early next year. At present, there is still uncertainty about the mutant virus in South Africa, and countries are still on alert. As the impact of the epidemic is difficult to dissipate in the short-term, ocean freight is still high, and it is difficult to see the ease of shipping schedules in Southeast Asia in 2021. Therefore, domestic supply will continue to be tight at the beginning of 2022, and a new round of downstream restocking requirements around the Spring Festival may become a new price driving point, and we need to focus on the upward risk of prices. As the shipping schedule eases, what needs attention is the impact on the domestic supply side.
Strategies: Neutral; in terms of spreads, the main focus should be on the narrowing of the spread between RU and NR.
Risks: epidemic situation; weather in main producing areas; shipping schedule.
Crude oil: The gap between supply and demand has narrowed, and the center of gravity of oil prices has shifted downward.
Fundamental trends: According to the balance sheet forecasts of the three major institutions in November (without considering the impact of Omi Keron on demand), the growth rate of demand is expected to decline from 2021, about 3.5 million barrels per day. If the impact of the mutant virus Omi Keron on demand is taken into account, the growth rate of demand is expected to be further reduced. From the perspective of supply, the growth of supply from non-OPEC countries is roughly the same as the growth of demand by about 3 million barrels per day, and the growth rate of supply from the United States and non-OPEC non-US countries has accelerated compared with 2021. Therefore, in the scenario where the impact of Omi Keron is relatively mild (the vaccine is effective, major economies will not be closed again, and the impact on demand is small), then the growth in oil demand for the whole year of next year is roughly equal to the growth in non-OPEC supply, both Almost balanced. Therefore, regardless of Omi Keron, the most critical factor affecting the supply and demand situation of the oil market next year will come from OPEC's supply growth, including OPEC's initiative to increase production and the pace and quantity of Iranian oil returning to the market. Taking 2021 as the base period for comparison, there will be an average annual supply and demand gap of about 1.5 million barrels per day. Therefore, if OPEC's annual average production increase is below 1.5 million barrels per day, the oil supply and demand gap will narrow next year. , But supply and demand are roughly balanced, and inventory growth is limited. However, if OPEC takes the initiative to increase production + Iran’s export recovery is greater than 1.5 million barrels per day, the form of oil supply and demand next year will turn from shortage to surplus. Considering that Iran itself currently has nearly 2 million barrels of surplus capacity that can be released, if OPEC wants to balance market supply and demand, the space for its initiative to increase production is very limited. Therefore, unless OPEC cuts production next year, it will be a high probability event that the oil market changes from short supply to oversupply. And if Omi Keron significantly drags down demand, the surplus in the oil market will increase next year. Therefore, OPEC faces major challenges in 2022, not only facing the uncertainty of Iranian oil returning to the market, but also facing the challenges brought by Omi Kejon. It is very difficult to achieve a double increase in oil prices and production in 2021. Under the most pessimistic scenario (the earlier return of Iranian oil and the re-locking of Omi Keron), it cannot be ruled out that OPEC will reduce production again next year in order to balance the oil market.
Price outlook: We believe that US$80 to US$85/barrel is already the top level of oil prices. Due to the reversal of the supply and demand situation in 2022, the oil market will shift from destocking to an accumulation cycle. The specific accumulation of stocks depends on the development of the epidemic, the time of Iranian oil returning and OPEC's production control policies. Under the baseline scenario, we expect the annual surplus to be about 1 million barrels per day. We believe that the operating hub of oil prices in 2022 will move downwards compared to 2021. We expect the central level of oil prices to be roughly US$60 to US$70/barrel (Brent). At the same time, we expect that the premiums in recent months will narrow and the long-term curve will be more flattened.
Strategy: Unilaterally tend to be neutral or neutrally bearish.
Risk points: Iran’s sanctions cannot be lifted within 2022; Omi Keron causes severe demand damage; OPEC abandons production control.
Copper: Low inventory is still the biggest obstacle to the turning point of copper prices.
Core point of view:
Sorting out the situation of all links in the industrial chain in 2021
1. Raw material end: The supply of copper concentrate is stable throughout the year, new production capacity is gradually released, and the supply is gradually restored, but it is still affected by factors such as epidemics, strikes, etc.
2. Smelting end: The output fluctuates to a certain extent due to the dual-control power restriction, but the overall upward trend remains unchanged. Affected by the high base number last year and the closure of the import window in the first half of the year, the overall import is not optimistic, but it still basically maintains the level of the same period in 2019.
3. Consumer end: The export of home appliances has become a bright spot for consumption, but the downturn in infrastructure and real estate still dominates consumption is not optimistic.
4. Inventory side: driven by production and speculative demand, global inventory has dropped to a low level.
Market forecast for 2022
Subject to the increased expectations of the Federal Reserve's interest rate hikes, the delay in the global epidemic being effectively controlled, and the weakening of traditional consumption, especially the continued downturn in real estate, the downward pressure on copper prices is greater. At the same time, the current global inventory is still at a historically low level, as well as the gradual recovery of the overseas economy next year, the effect of domestic infrastructure investment may gradually appear and other factors may cause the price decline to not be very smooth, and the volatility may increase.
2022 trading strategy recommendations: neutral
Fed rate hike expectations; domestic real estate related policies; inventory changes