A game of strong reality and weak expectations, steel prices are shifting downward.
In the latter half of May, steel prices continued to fall, rebar 、 hot-rolled coil prices of the main contracts all fell below the phased low point in September last year; after early June, prices began to show a range-bound trend. Regarding the future trend, I believe that the probability of negative feedback in the industrial chain is low in the near term, but there is no obvious driving force for an increase, and the overall price will continue to fluctuate within a range. A decline may resume in mid-to-late July.
The decline in steel prices since May is mainly due to two factors: weakening demand expectations and macroeconomic disturbances. Actual demand still has some resilience, mainly supported by manufacturing and export demand for steel mills' orders. According to statistics, the apparent consumption of the five major steel varieties in May decreased by 1.94% year-on-year, while the consumption of sheet steel still increased by 1.25% year-on-year; steel exports also continued to grow year-on-year and month-on-month. The steel market shows a pattern of strong reality and weak expectations, which can also be verified by the continuously expanding water content in the market.
Macroeconomic disturbances are partly due to the relatively vacuum period of domestic policies and partly due to trade conflicts. Around the Dragon Boat Festival, the United States announced an increase in steel tariffs to 50%, leading to an accelerated decline in steel prices from late May to early June.
Demand resilience remains, but there is downward pressure in the later period
As mentioned earlier, the steel market showed a pattern of strong reality and weak expectations in April and May. Therefore, whether the weak expectation of demand will materialize after June has become one of the key factors determining the trend of steel prices.
Current external demand remains strong. From January to May, direct steel exports increased by 8.6% year-on-year, adding 3.83 million tons, with the growth rate rising for two consecutive months. According to my research, the current export situation of steel mills is still good. Some steel mills in North China have received export orders for August and September, and the export profits of some varieties can reach 200-300 yuan/ton.
From the perspective of price difference, whether it is hot-rolled coils or steel billets the domestic and international price difference is at a high level. Therefore, exports will still support steel demand in the next 2-3 months, and the positive performance of exports will, to some extent, alleviate the supply pressure in the domestic market.
Domestic demand this year is mainly supported by manufacturing, while construction demand has been declining.
From January to April, manufacturing investment increased by 8.8% year-on-year, still showing some resilience. Unlike the seasonal characteristics of "golden March, silver April" and "golden September, silver October" in the construction industry, the seasonality of manufacturing demand generally shows high at both ends and low in the middle. The second and third quarters are both the off-season for demand. The slight increase in inventory of hot-rolled coils for two consecutive weeks also indicates that manufacturing demand has weakened in the off-season.
In terms of the construction industry, June is the rainy season in East China, and typhoons will also hit South China recently, which will inhibit the demand of the construction industry.
At the same time, in mid-June, the US Department of Commerce announced that it would impose a 50% tariff on imported steel household appliances from several countries, and indirect steel exports may also be affected in July.
In general, current demand is better than market expectations, but there is downward pressure in the next three months.
Pig iron production remains high in the short term, and the probability of negative feedback in the industrial chain is low
Although steel prices continued to weaken in April and May, steel mills' profits remained considerable due to the factor of coking coal price concessions. According to my calculations, the profit of long-process rebar is around 200 yuan/ton, and that of hot-rolled coils is 110 yuan/ton. In mid-June, the profits of several steel mills I investigated were also between 150 and 160 yuan/ton, and they were basically operating at full capacity.
Therefore, steel mills currently have little willingness to actively reduce production, and it is expected that the daily average pig iron output may remain at 2.4 million to 2.45 million tons for a considerable period of time.
In addition, the geopolitical conflict in the Middle East has recently erupted again, causing a sharp 18% increase in crude oil prices, which may affect steel raw materials in two ways. First, considering the substitutability between crude oil and coal as substitutes, the rise in crude oil prices may provide short-term support for coking coal prices . In addition, with coking coal prices at a low level, news about coal mine production cuts has also increased recently. Second, rising freight rates may indirectly affect iron ore prices . In the last two trading days of last week, the freight rates of Brazilian and Australian iron ore increased by 12.56% and 14.87%, respectively. Under these circumstances, the probability of negative feedback in the industrial chain is low.
From late June to mid-July,
the market may refocus on policy expectations
Following the introduction of a series of incremental policies in early May, China entered a phased policy vacuum period. However, from late June to mid-July, the market's focus may shift back to the increase in macroeconomic policies.
The latest State Council executive meeting emphasized further optimizing existing policies, improving the systematic and effective implementation of policies, and making greater efforts to promote the stabilization of the real estate market. Subsequently, Guangzhou took the lead in announcing the complete removal of purchase restrictions, sales restrictions, and price restrictions. In addition, according to convention, the semi-annual meeting of the Central Committee of the Communist Party of China will be held in late July, and the market may still have some expectations for policy increases.
In fact, recent financial data has also improved. In May, the difference between the growth rates of M1 (narrow money) and M2 (broad money) was -5.6%, up 0.9 percentage points from April. The difference between the growth rates of social financing and M2 was 0.8%, up 0.1 percentage points from April. This shows that both economic activity and credit conditions have marginally improved.
Based on the above analysis, the current steel market presents a pattern of strong reality and weak expectations. Steel mills are making considerable profits, and there is a possibility of improvement in macroeconomic expectations. Therefore, in the short term, the industrial chain does not have the conditions for negative feedback, and may mainly fluctuate at the bottom or rebound in stages. However, after mid-July, there is pressure for further weakening of demand, which may lead to a further contraction of steel mill profits. Coupled with the implementation of policy expectations, it may induce negative feedback in the industrial chain, specifically manifested as inventory accumulation—steel price decline—losses—production reduction—raw material price decline.
