June Steel Market Under Weak Demand Expectations: Analysis of Steel Price Trends and Exploration of Repair Opportunities
Returning from the Dragon Boat Festival holiday, the domestic steel market opened weakly, Rebar futures prices opened slightly lower after the holiday, hitting a multi-year low of 2912 yuan/ton during the session. Although the steel demand in June is further weakening in the traditional off-season, the "strong reality, weak expectation" divergence in steel demand since May has also increased steel prices future trend variables.
In the view of Donghua Futures, in the short term, the fundamental contradictions in the steel market are not significant. After June, it will enter the verification stage of weak demand expectations. If this expectation is verified, the steel mills' profits will be further compressed, and the price center will continue to shift downward. Otherwise, there may be a phased repair.
Although the steel market generally entered the off-season in May, the actual performance of the demand side was not too bad. The latest data from the China Iron and Steel Association shows that in late May, the social inventory of five major steel varieties in 21 cities was 7.94 million tons, a decrease of 390,000 tons month-on-month, down 4.7%, and the inventory reduction rate expanded; and it decreased by 2.67 million tons year-on-year, down 25.2%.
"In May, the steel market entered the traditional off-season, but the actual demand performance was still acceptable." said Liu Huifeng, chief researcher of ferrous metals at Donghua Futures.
According to him, in the last week of May, the apparent consumption of the five major steel varieties according to the Steel Union was 9.1376 million tons, an increase of 90,300 tons month-on-month, and an increase of 59,800 tons year-on-year, marking the first year-on-year increase after three consecutive weeks of decline. In addition, from January to May, the apparent consumption of the five major steel varieties decreased by 0.11% year-on-year. From a product perspective, due to the resilience of the manufacturing industry and the delayed realization of the expectation of weakening exports, the consumption of plates was significantly better than that of long products. In the first five months, the consumption of plates increased by 2.59% year-on-year.
However, "the market is rather pessimistic about future demand expectations." Liu Huifeng added, specifically, currently, the discount of both rebar and hot-rolled coil main contracts to spot prices is at a high level in recent years, and the news of the escalation of trade issues during the Dragon Boat Festival may further exacerbate this pessimistic expectation.
Entering June, Liu Huifeng further stated that the steel market may enter the verification stage of weak expectations. If the actual demand maintains resilience, the previous weak expectations may have a phased repair; otherwise, the market price may continue to decline.
From the supply side, in the short term, domestic steel supply remains at a high level. Data from the National Bureau of Statistics show that from January to April, the country produced 345.35 million tons of crude steel, an increase of 0.4% year-on-year; production of pig iron was 288.85 million tons, an increase of 0.8% year-on-year; and steel production was 480.21 million tons, an increase of 6% year-on-year. "Under high profits, steel mills are unwilling to reduce production." Liu Huifeng explained, and considering that the profits of long-process steel mills are still considerable recently, and the average daily output of pig iron in the first and middle ten days of May announced by the China Iron and Steel Association increased by 27,000 tons month-on-month compared with April. Therefore, the daily output of pig iron according to the National Bureau of Statistics in May may still increase, but the output of crude steel may be dragged down by short-process data, and the iron-steel ratio may continue to rise.
Regarding the changes in steel supply after June, Donghua Futures believes that it is necessary to pay attention to the two major factors of steel mill profits and steel demand changes. Among them, in terms of steel mill profits, since the profits of long-process steel are still considerable, steel mills are not willing to reduce production. From the demand perspective, "if the weak demand expectation in June-July is realized, it will continue to compress steel mill profits and then force steel mills to reduce production." Liu Huifeng added.
Overall, in June and July, the supply of long-process steel mills may remain at a high level for a period of time, and the output of short-process steel mills may decline. "Therefore, the judgment that steel supply has approached the top area is still maintained." Donghua Futures said.
In summary, Donghua Futures believes that the key to the trend of the steel market in June is whether the weak demand expectation can be realized. If this expectation is verified, the steel mill profits will be further compressed, and the price center will continue to shift downward. Conversely, if the weak demand expectation is temporarily falsified, although the steel supply may continue to remain at a high level for a period of time, the upward elasticity is also limited, which may lead to a phased repair of steel prices.
In addition, iron ore 方面，虽然 hot metal production the top has been basically established, but because steel mills have considerable profits and are unwilling to reduce production, the decline in hot metal production may be relatively tortuous. However, combined with iron ore supply end data, it is generally judged that there is still room for decline in ore prices, but the process may be relatively tortuous.
