Hot-rolled coil bottom or already appeared, but there is still a risk of a second bottom in the second half of the year
Since June, the domestic steel market has seen a strong rebound. As of July 11, hot-rolled coil futures (2410 contract) closed at 3273 yuan/ton, up 221 yuan/ton or 7.24% from its early June low; spot prices in East China also rose by 130 yuan/ton, or 4.1%. I believe the medium-term bottom for hot-rolled coils may have been reached, but there is still a risk of a second bottom in the second half of the year.
The rebound in steel prices since June is due to several factors:
Firstly, macroeconomic expectations have gradually improved. The US-China trade conflict has been showing signs of easing, and the sixth meeting of the Central Committee for Financial and Economic Affairs in early July strengthened market expectations for "Supply-side Structural Reform 2.0." Recent positive news on urban renewal has further boosted market sentiment.
Secondly, the supply and demand situation for hot-rolled coils is better than the market previously expected. In June, China's automobile and machinery production and sales both grew by more than 10%, and the apparent consumption of hot-rolled coils has also shown positive growth for three consecutive weeks since late June.
Continued improvement in macroeconomic expectations
The medium-term bottom for hot-rolled coils may have been reached. Improvement in macroeconomic expectations is expected to continue in the second half of the year. Overseas, after starting a rate-cutting cycle last year, the Federal Reserve has kept interest rates unchanged this year and has been cautious in its statements on monetary policy. However, recently, Fed officials have softened their stance on rate cuts; at the same time, the 10-year breakeven inflation rate, a leading indicator of inflation that I observe, has peaked and fallen since February this year, leading inflation by about six months. The Fed's June economic projections were also more cautious than those in March, including downward revisions to GDP (Gross Domestic Product) expectations and upward revisions to unemployment expectations. Therefore, I expect a higher probability of the Fed restarting rate cuts in September, and possibly multiple rate cuts after 2026.
China's monetary policy has also been very cautious in the first half of this year, with only one LPR (Loan Prime Rate) cut so far, by 0.1%, mainly due to exchange rate factors. If the Fed starts cutting rates in September, China's monetary policy space will also open up. Both countries may enter a period of easing simultaneously.
In addition, the semi-annual meeting of the Political Bureau of the CPC Central Committee will be held at the end of July, and there has been much positive news about urban renewal in the market recently, so the probability of further policy measures in the second half of the year remains high. After the easing of the situation in the Middle East at the end of June, I observed that copper and the copper-oil ratio and gold-oil ratio are rising and falling respectively, a combination that generally indicates that the economy is in the early stages of recovery. Therefore, from a macroeconomic perspective, hot-rolled coil prices may have already reached their medium-term bottom.
Risks of marginal weakening in manufacturing and exports
The downstream users of hot-rolled coils are mainly the manufacturing industry and exports, and the incremental demand for steel in the first half of the year was also mainly contributed by these two parts. The apparent consumption of hot-rolled coils ( Mysteel data) increased by 1.2% year-on-year in the first half of the year, rebar apparent consumption fell by 3.8% year-on-year. Data from the National Bureau of Statistics show that China's apparent consumption of crude steel fell by 3.16% year-on-year from January to May, while total demand, considering net exports of crude steel, fell by only 0.76%. However, there may be a marginal weakening risk in both manufacturing and exports in the second half of the year.
In terms of exports, the "rush for exports" phenomenon has lasted for two to three quarters. Judging from leading indicators, the momentum may weaken in the future. The Ningbo Container Export Freight Index for the US West Coast has fallen for five consecutive weeks, with a cumulative decline of 66.9%; exports from South Korea and Vietnam have also fallen to varying degrees; at the same time, after the tariff extension policy was implemented, the necessity of continuing to "rush for exports" has weakened.
Apart from the "rush for exports" factor, the resilience of manufacturing investment mainly benefited from the support of the "two new" (a new round of large-scale equipment renewal and consumer goods trade-in) policies. However, after the second quarter, the policy effect has begun to weaken. In the first five months, the purchase cost of equipment and tools in fixed asset investment increased by 17.2% year-on-year, a decrease of 0.9 percentage points from January to April, marking the second consecutive month of slowing growth. The trend of manufacturing sub-sectors has also diverged. Passenger car sales growth in the second quarter remained above 10%, and dealer inventories were low; funds for consumer goods trade-in have been disbursed in July, but the total amount for the second half of the year is 1380 billion yuan, lower than the 1620 billion yuan in the first half of the year, and the production plan for home appliances in July has declined significantly. If there are no new incremental policies, home appliance demand may fall in the future. Although engineering machinery is supported by infrastructure investment, only 2000 billion yuan of ultra-long-term special government bonds are used for equipment renewal, and the risk of diminishing marginal policy effects should also be noted in the future.
The marginal weakening of manufacturing and export demand will put downward pressure on hot-rolled coil prices. I observed that cold-rolled coil and hot-rolled coil price spreads have narrowed from a low of 700 yuan/ton in early April to below 300 yuan/ton, also reflecting the marginal weakening of downstream demand for steel plates.
Pay attention to when the period-spot positive spread build-up will end
This round of steel price rebound has strong characteristics of expectation-driven, and in the off-season of steel demand, this characteristic makes it easier for the market to give a premium. As of last weekend, the main contract price of hot-rolled coils is basically flat with the spot price, compared with the strip steel price in Tangshan, Hebei Province, it is 102 yuan/ton higher. This provides risk-free arbitrage opportunities for traders. During the process of building up positive spread positions, some spot liquidity is locked up; at the same time, there is also the covering of short positions by downstream users and the closing of previous period-spot reverse spread positions, further strengthening this positive feedback logic. Recently, the spot inventory of coils and strips in Tangshan has increased for three consecutive weeks, with a cumulative increase of 70,800 tons, which also shows that the period-spot positive spread positions are gradually being built up.
However, it is important to note that the current period remains the off-season for steel demand. A survey conducted in early July in Lecong Town, Foshan City, Guangdong Province, revealed that actual demand in June decreased by 20% to 30% compared to May. If subsequent macroeconomic policies are implemented, and if peak season demand recovery falls short of expectations, the closing of long-short spreads could cause a secondary bottom in both spot and futures prices.
Based on the above analysis, we believe that the rebound in hot-rolled coil prices this round is mainly due to three factors: improved macroeconomic expectations, actual off-season demand exceeding market expectations, and strengthening cost-side factors. Considering the continued improvement in macroeconomic expectations in the second half of the year, and the possibility of both China and the US entering a period of easing monetary policy simultaneously, the medium-term bottom of hot-rolled coil prices may have already appeared. However, due to the weakening of manufacturing and export demand and the subsequent impact of closing long-short spreads, hot-rolled coil prices may experience a secondary bottom in late August to September.
