Gordon L. Johnson is a commodities bear who is shorting a number of related industrial stocks, and he now sees risk to his thesis on iron ore prices.

Johnson, head of alternative energy, metals, mining and equipment research at Axiom Capital Management in New York, notes iron ore exports from Australia and Brazil increased 9 percent year on year in June, but, Johnson and associate James A. Bardowski, also note U.s. steel imports in June rose 135 and are on pace to do the same in July. They write:

"Near-Term Risk Potential to Our Iron Ore Thesis. After falling >$40 per ton from the peak in mid-February to the trough in mid-Jun, 62% Fe iron ore prices have seen a mild rebound over the last two weeks, rising to the low $60s per ton. While we continue to have a negative long-term outlook, we do see near-term risks to our thesis that could lend further support to prices, namely low steel mill inventory & high mill margins. Specifically, from the February peak thru last week, rebar and HRC [hot-rolled coil] inventories in China were -56% & -22%, reaching near multi-year trough levels & implying the next restocking cycle may be upon us. Further, given resurgent steel prices in China since April, which are likely to see further upside on the heels of any restock, coupled with the fall in raw material costs, using our internal cash margin index for generic Chinese BOF [basic oxygen furnace] steel mills, mill margins reached the highest level in late Jun, at 30%, since Aug 2016 , which provides room for iron ore sellers to raise prices.

On the other hand, while China’s steel output YTD is at a record high, iron ore port stocks, which totaled 139Mt on 7/7, -71 basis points week on week, have still been accumulating, +22% YTD; and with:

(a) our view that the current infrastructure boom has been front-loaded, as

(b) new housing starts appear to be slowing (i.e., growth fell from +13% y/y in Mar to +5% y/y in May), &

(c) increasing pressure from G20 leaders on China to curtail output, we believe China’s 2H17 steel consumption/output will likely slow – a negative for iron ore. Thus, we see any bullish sentiment borne out of a steel restocking effort as likely temporary. ..."

• [Editor:Wang Linyan]