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Are you allowed to iron money3/24/2023 ![]() Mid-distillates are critical for the transport sector and this support of fuel prices could help to hold global inflation at a higher pace than you would otherwise expect given economic conditions.A vegetarian diet is one that does not include any meat or seafood. This is the result of a lack of suitable refining facilities rather than robust demand. ![]() However, this year mid-distillate inventories are so low around the world that prices are expected to remain relatively strong in any downturn until inventories have normalised. This dynamic in part explains why inflation moderates during an economic slowdown. Consumption of middle distillates, such as diesel, gas oil, kerosene and jet fuel, tend to be the most sensitive to the business cycle and thus should be the hardest hit in the event of a downturn. This saw crude return to a low of US$84/bbl in late October. ![]() This saw some heavy buying in the market with crude prices hitting a high of US$96/bbl, up from US$83/bbl in late September, but this rally was short lived as investors abruptly reversed course last week as the optimism caused by OPEC+ production cuts were replaced by pessimism stemming from the worsening economic outlook. On October 5th, OPEC+ announced that it would reduce its combined output target by 2 million barrels per day from November. It is worth noting that currently thermal coal continues to trade at a material premium to met coal due to limited liquidity with producers entering the market to meet contractual obligations for thermal coal. As a result we expect the Newcastle thermal coal benchmark to fall from ~US$380/t currently to ~$150/t by end 2023 and then down to $105/t by 2024. We do expect that coal supply will normalise from Australia (with the ending of the third La Nina) and South Africa potentially adding an addition 20-30Mt per year to the seaborne trade. It is widely expected that the high-CV thermal coal market will remain tight at least into the first half of 2023 supported by robust demand (as the EU switches from Russian supplies) and gas prices remain elevated. On top of this, despite the recent fall in gas prices, coal is still around 47% cheaper to use in the EU for power generation when compared to gas. However, over recent weeks it does appear that shipments have flattened out. So far this year total coal shipments are up around 1% year to date with Australian supplies down -6%, Colombia down -8% and South Africa down -8% all offset by a solid increase from Indonesia of 11% while exports from North America are up 4%. Our forecast has iron ore holding around US$80 into early 2023 before weakening to US$70/t by end 2023 due to a gradual lift in iron ore supply from Australia and Brazil and China now well past peak steel. For these reasons we remain cautious for iron ore even though we see the economic fundamentals improving for China. ![]() From the supply side, iron ore shipments are flat in the year to date with Australia +1%, Brazil -2% and South Africa +2%. It is also likely that Chinese crude steel production could fall by around 5% compared to September if authorities enforce the target for lower production in 2022. There does appear to be some evidence that Chinese iron ore fundamentals are starting to weaken: pig iron production was softening as we moved through October iron ore port inventories are lifting again and, rebar prices continue to soften. Recent developments that fed these fears included: China’s manufacturing PMI unexpectedly falling in October to 49.2 (with reports linking the decline to softening global demand and the increasingly strict COVID restrictions) China’s steel PMI turning weaker after two consecutive months of improvement and, further signs of deeper issues in the Chinese property market. This pressure emerged due to concerns about Chinese demand in the face of increasing COVID disruptions, weaker export orders and further weakness in the property sector. The pressure on iron ore prices intensified over the last week with 62% fe fines down ~US$15/t to $79/t, the lowest level since early 2019. ![]()
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