Black Commodity Futures Underperform: Why？

As November arrives, the black metal industry chain enters its traditional winter storage period, which usually leads to a boost in futures prices. However, this year presents a different scenario. The Wenhua Black Chain Index, which reflects the price trends of black metal commodities (referred to as the "black series"), has actually declined, showing a cumulative drop of over 3% this month.

Insiders indicate that the recent operational logic of black series commodity futures has shifted from policy expectations back to industrial realities. With the demand for construction steel entering an off-season, the market remains pessimistic about the future winter storage demand for steel. Although winter storage has commenced, its impact on futures prices for black series commodities appears limited. Given these weak realities combined with strong policy expectations, black series commodity futures are likely to remain within a fluctuating range for the rest of the year.

Coal Sector Leads Decline

Data shows that as of the close on November 26, the Wenhua Black Chain Index (which includes coke, coking coal, iron ore, rebar, hot-rolled coils, ferrosilicon, and silicon manganese) stood at 122.57 points, reflecting a cumulative decline of 3.49% since the start of the month.

The chief analyst for black metals at Guotou Futures noted, "Recently, following the culmination of significant domestic meetings and other macro events, the operational logic of black series commodity futures has shifted from policy expectations back to industrial realities, leading to a more rational market sentiment."

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From the perspective of the industry chain, Cao Ying pointed out that the terminal demand for steel remains compromised due to persistently weak data on new real estate starts. Despite robust export figures and resilient performance in manufacturing, overall demand for steel remains lackluster. As the market gradually enters the off-season for construction steel, there persists a pessimistic view regarding future winter storage demand for steel, leading to a downward trend in steel prices, which has dragged the entire black series commodity futures market into a weaker oscillation.

From the perspective of sub-indices, since November, the coal sector index, steel sector index, and alloy index have cumulatively decreased by 5.98%, 2.08%, and 1.86% respectively.

Regarding the larger drop in the coal sector index this month, Yang Hui, a black analyst at Zhengxin Futures, stated, "In the coking coal market, while domestic production has slightly declined year-on-year this year, the increase in imports has effectively supplemented the domestic supply. The overall market remains oversupplied with coke, and with coking plants maintaining profitable operations since October, production activity has been high, resulting in sustained high overall supply. As terminal demand seasonally weakens, daily pig iron output has peaked, further loosening the supply-demand balance for both coking coal and coke."

Cao Ying added that domestic coal production remains high with a slight upward trend and that imported coal from Mongolia continues to flow smoothly, thereby exacerbating the market's supply surplus. Consequently, the oversupply issue in the coking coal market is difficult to resolve.

How Strong is the Winter Storage?

Historically, from mid to late November until the Spring Festival, downstream enterprises typically restock raw materials to prepare for the extreme winter weather and transportation challenges during the holidays, a practice known as winter storage.

Yang Hui mentioned, "Winter storage has commenced, especially at the raw material end. Downstream entities have begun modest restocking of coking coal, coke, and iron ore, and some steel mills have already issued winter storage policies."

"The raw material end has indeed started winter storage," said Liu Huifeng, chief researcher on black metals at Donghai Futures. "The iron ore inventory of 247 steel mills across the country bottomed out and began to rise by the end of October, with stocks of coke and coking coal at steel mills also showing varying degrees of recovery."

Typically, winter storage provides substantial support for prices in the black series commodity futures market, especially in years where expectations for winter storage are favorable and the actual scale of storage is considerable. However, according to Yang Hui, the prevailing sentiment among industrial enterprises regarding winter storage this year seems relatively weak.

"Due to uncertainties surrounding next year's demand expectations, most steel traders are adopting a cautious approach, which similarly affects the winter storage outlook at steel and coking plants," Yang Hui elaborated. "Overall, while winter storage will provide some support for prices in the black series commodity futures, its impact is likely to be limited."

However, in Cao Ying's view, in recent years, there have been notable signs of diminishing emphasis on the concept of winter storage, whether among traders regarding steel or among steel mills concerning raw materials.

Cao Ying explained that this is primarily evident in three aspects: first, steel prices have been in a bear market for several years, leading to subpar results from traders' winter storage efforts; second, steel mills are increasingly adopting pricing models that lock in volumes without locking in prices, such as "post-settlement" methods, which has made fixed-price winter storage arrangements less common; third, ongoing improvements in transportation and warehousing conditions allow steel mills easier access to raw materials, reducing the necessity to significantly stockpile during the winter due to concerns about capital occupancy.

Cao Ying commented, "Relative to last year's internal stock levels, while current sampled steel mills have room for winter storage in terms of coking coal, coke, and iron ore, the ample supply of all raw materials this year and the significant intermediate inventory levels make the demand for proactive raw materials restocking by steel mills currently weak. Additionally, traders also have modest expectations for price increases post-Chinese New Year, resulting in a lack of strong demand for winter storage of steel."

When Will the Price Decline Cease?

Looking ahead, Liu Huifeng believes that in the remaining time of the year, weak realities and strong policy expectations will continue to dominate the operating logic of black series commodity futures prices. "Aside from significant meetings scheduled for December, the current absolute level of steel inventory remains low, and winter storage has yet to fully commence, delaying the market's focus on the weak demand situation. Furthermore, the initiation of winter storage at the raw material end ensures that cost support for the steel market persists, and we anticipate that steel prices will fluctuate within a strong bias in the short term. After significant meetings conclude, market attention will shift back to tariff risks and the weak performance of actual demand, at which point prices in the black series commodity futures could see a pullback," Liu Huifeng stated.

Cao Ying asserted that as the delivery date for the 2501 contract of black series commodities approaches, and considering that there will still be a series of significant meetings towards year-end likely affecting macro sentiment, it is expected that black series commodity prices will generally maintain a trend of oscillation at the lower end, with potential for slight increases during this period.

Yang Hui believes that supported by major conference policy expectations and winter storage factors, there is strong support at the lower end of prices for black series commodity futures this year. However, with terminal demand in the off-season and weak expectations for winter storage from the industrial side, the positive impact on market prices is likely to be limited, with black series commodity futures probably remaining in a range-bound oscillation throughout the year. In this context, the cost-performance ratio for unilateral investment opportunities is relatively low, suggesting consideration of selling put options or a dual selling strategy on rebar, hot-rolled coils, and iron ore.

Regarding investment opportunities, Cao Ying believes that while macro factors continue to disrupt trading sentiment this year, the overall direction remains optimistic. Therefore, black series commodity futures prices still possess a certain degree of upward elasticity, especially for coking coal and coke futures with relatively confident winter storage demands, which might have opportunities for price rebounds. However, given the bleak prospects for terminal demand and its challenging improvement in the short term, the extent of price increases in black series commodity futures is also likely to be limited, cautioning against excessive optimism.