Last week was upsetting for steel and iron ore prices as investors lost further confidence in the strength of the metal industry. Coal also traded low in last month. Both coal and iron ore experienced huge sell offs as Chinese steel producers cut down their production, thus reducing demand for raw materials. Australian iron ore has fallen 30 percent since touching the peak price in February, according to the Steel Index. The Reserve Bank of Australia's commodities index was down 2.6 percent in May. The central bank estimates that spot prices of iron ore, coking coal and thermal coal fell 5.3 percent in May.
Steel Prices Too Low For Bears?
Bank of America Merrill-Lynch in their latest report find the decreased steel production could be good for the commodity's pricing power but is bad for the input costs. They also note that the price of iron ore and met coal was down even before the guidance for lower steel output was released. With steel industry's input already at an 18 month low, hedge funds interviewed by BAML were uncertain whether it would be wise to enter the market now as shortsellers.
In regards to met coal, BAML thinks that the market is oversupplied and the weak pricing trend is likely to remain for a longer period. In the troubled industry, the analysts think Nucor Corporation (NYSE:NUE) and Allegheny Technologies Incorporated (NYSE:ATI) are less vulnerable to the steel prices and have some self reliance.
Hedge Funds Coming Out With Steel New Shorts
While BAML may be seeing nervousness among hedge funds initiating shorts in these sectors, we have seen many new short disclosures in the related companies in the past weeks. Admittedly the most well timed short bets were those that were initiated in February to March of this year. There are several hedge funds which are positioned on the short side of steel, iron ore and copper. In the last few weeks, the race to short metals and mining sector saw extra frenzy, Discovery Capital initiated a short in Anglo American plc (LON:AAL) (OTCMKTS:AAUKY), one of the largest players in the industry.
We have covered the short bets of hedge funds in European steel sector, companies like Acerinox SA (MCE:ACX), SSAB AB (STO:SSAB-A) (STO:SSAB-B), Salzgitter AG (ETR:SZG), Kloeckner & Co SE (ETR:KCO) (FRA:KCO) have been targeted by famous names of hedge fund industry including, Pennant Capital, AQR Capital, Marshall Wace and Kynikos Associates.
Among iron ore miners, noted hedge fund managers had laid out their bearish thesis quite a while ago. BlueMountain Capital, Jim Chanos and Odey Asset Management are known to be short Fortescue Metals Group Limited (ASX:FMG), Odey Asset Management is also short ArcelorMittal (ADR) (NYSE:MT).