Given the rapid change in the market and the bearish sentiment now prevailing, the question becomes how low could prices go; at what point does it become attractive to move back into the market? Looking at recent cyclical lows, or more fundamentally, calculating the average cash costs for the top (i.e., most expensive) quartile of operating mines yields the same answer: an absolute bottom in this market looks to be near $5,000 per metric ton.
We do not think prices will realize anything near another $3,000 per metric ton correction for two reasons. First, the principal cause of the correction-slowing consumption growth, and in particular, declining mainland Chinese consumption-will not persist even to late 2022. A recovery in Chinese consumption later this year will, by itself, lend prices some support.
Second, inventory remains low and has shown no sign of increasing during the past two months. When translated into weeks of consumption, April's reading of 2.7 is well below an equilibrium level of 3.8 weeks; i.e., the market is reading fundamentally tight. We do expect the market to shift into surplus over the next year. However, the projected size of the surplus is modest and points to an equally modest inventory build, meaning the market is expected to still read fundamentally tight at the end of next year.
This does not mean that prices cannot fall further, but these factors would seem to limit the market's downside.
