This is highlighted by China’s port inventories eroding by 27 million tonnes in the first half, but expanding by 11 million tonnes so far in the second half.
The changing supply dynamic has coincided with signs that China’s steel production has fallen sharply as mills grapple with weak margins. This led to China Iron and Steel Association members’ mill output reaching the lowest level since November in late July.
However, Macquarie noted that steel margins had turned positive lately because of the combination of improving steel prices and soft iron ore prices.
But Morgan Stanley strategists remain doubtful about the bulk commodity’s prospects in the back half of this year.
“We see little reason to be bullish on iron ore into year-end,” said Marius van Straaten, commodities strategist at Morgan Stanley. “Any real rebound in the iron ore price hinges on a China-led steel demand recovery.”
Acknowledging that steel end-use demand could pick up in the coming months during the autumn construction season, Morgan Stanley said it did not see a big turnaround ahead.
China’s property construction, which typically accounts for about 40 per cent of its steel end-use demand, has been slowing, with first half property starts down 34 per cent year-on-year, and June starts down 45 per cent.
Mortgage delinquencies on unfinished developments are putting further pressure on the property sector.
“While this latest situation might be contained and property activity might not slow further from current levels, there are as yet no signs of a meaningful recovery,” Mr van Straaten said.
And while infrastructure stimulus might offset part of the weakness in China’s property sector, Morgan Stanley said that Beijing appears reluctant to deploy high levels of stimulus.
The broker estimates there is at least a six-month lag before the stimulus will translate to a spike in physical demand, meaning the benefits won’t be seen until the construction season after next year’s Lunar New Year holiday.
Meanwhile, iron ore supply is holding up well, with July shipments from Australia up 4 per cent year-on-year, and Brazil shipments increasing 7 per cent month-on-month and 3 per cent year-on-year.
At the same time, China’s domestic iron ore supply appears robust, increasing 13 per cent in the first half compared with a year earlier.
Morgan Stanley strategists see downside risk to their second-half base case price target of $US130 a tonne, but expect prices to stay clear, on average, of their bear case scenario of $US80 a tonne.