Weekly Observation of Steel Market: Off-Peak Weak Market - Policy Expectations Weaken, Supply and Demand Logic Strengthens
Jun 25, 2024
Last week's characteristics of the ferrous market were as follows: The driving force for the price increase of ferrous goods by macro (domestic and foreign) and production restriction policy expectations has significantly weakened, with the pricing logic of the steel market fundamentals further strengthened.
After the expectation of a rate cut in June failed, coupled with the gradual digestion of previous policy benefits, the market's optimistic expectations since May have begun to cool. The National Bureau of Statistics announced that the housing prices of the first and second-hand houses in 70 major and medium-sized cities across the country fell across the board in May, with the decline in second-hand housing prices accelerating in May, offsetting the rebound in the sales volume of second-hand houses in some cities brought by the new policy on May 17.
The non-ferrous metals have reversed the previous bull market, and the new round of commodity cycle narrative represented by copper has already faltered before it started: The Shanghai electrolytic copper inventory in June reached a four-year high, indicating that the logic of a new bull market for commodities is relatively far-fetched before the full recovery of China's commodity demand.
Although the intention and actions of production restrictions have gradually become more specific, there is still a lack of details in the intensity and pace of production restrictions. From a timeline perspective, the production restriction work is generally promoted at the end of June for the preparation of crude steel regulation, details are determined in July and August, and it is not until the production restriction in the autumn and winter that it can be fully reflected in the output.
The focus of market pricing logic has shifted to the basic logic: The arrival of the plum rain season in the Yangtze River Delta marks the beginning of the steel off-season, and the high position of steel production and the marginal deterioration of off-season demand will continue to suppress the price of finished products: The two counterattacks in the black series commodity market in the past two weeks are difficult to continue.
Last week, the daily average output of pig iron from 247 steel mills of Mysteel increased slightly by 60,000 tons to 2.399 million tons, setting a new high for the year. According to Mysteel research, some steel mills will be maintained or capacity will be replaced this week, and the output of pig iron may peak and fall back, but the daily output is still at a high level of 2.38-2.4 million tons.
The downstream demand for building materials is still declining. Last week, the cement shipment volume decreased by 1.3% month-on-month, and the sand and gravel shipment volume decreased by 1.8% month-on-month. The market continues to be pessimistic about the subsequent seasonal decline in demand: 1) After entering the plum rain season on June 16, the high temperature and rainy weather in the south restricted the progress of the construction site's mid-year rush; 2) According to Mysteel research, the infrastructure projects supported by central funds are mostly water conservancy projects in the north, with limited steel intensity; 3) Research on the construction payment node at the end of June indicates that the project fund situation is still tight; 4) The expectation of accelerating the issuance of special bonds and national bonds is difficult to confirm in the short term (the fund delivery cycle is at least three months, up to half a year, and the efficiency of infrastructure project fund use is relatively low under the pressure of local debt).
According to historical data from the industry online and the China Automobile Manufacturers Association, the production of home appliances and automobiles in the third quarter is significantly lower than in the second quarter, and manufacturing is about to enter the off-season.
In the short term, the high supply of steel will continue to suppress steel prices during the off-season, but it will support the price of raw materials. However, behind the fluctuation of black series commodity prices is the continuous accumulation of supply and demand contradictions after entering the off-season, and the key to resolving the contradiction is that steel mills can reduce production in a timely and effective manner under the pressure of finished product prices. However, the change of market prices is often faster than the response plans and actions of market participants, and the market stage of the black series market remains weak, and attention should be paid to the downward risk brought by the fluctuation of steel prices in July.
Due to the financial data in May and the real estate development investment situation being lower than market expectations, coupled with the market's pessimistic attitude towards the off-season demand for rebar: last week, the average price of Shanghai rebar * decreased by 24 yuan/ton compared to the previous week to 3566 yuan/ton. Last week, the small sample output of rebar continued to decline for three consecutive weeks, with a week-on-week decrease of 190,000 tons to 2.305 million tons, with both long and short processes reducing. Looking at the regions, the reduction in the East China and Northwest regions is more obvious: Xinjiang in the Northwest region has reduced production autonomously due to large inventory pressure, and some steel mills in the East China region have turned to produce hot-rolled coils and some steel mills are under maintenance, resulting in a larger decrease in output. Due to the recent decline in scrap production, the scrap steel price is relatively strong, leading to continuous losses in electric furnaces. Last week, the utilization rate and start-up rate of 87 independent electric arc furnaces decreased month-on-month, and it is expected that the short process will still maintain the current low-level production state next week. At present, the steel mill inventory pressure is still acceptable, and the actual profit is near the break-even line: the steel mill still has the conditions for resumption. In addition, Mysteel research shows that there are still plans for resumption in most areas of steel mills next week: it is expected that the small sample output of rebar will increase by 440,000 tons to 2.349 million tons this week. After the end of the middle and high school exams and environmental protection inspections, downstream demand has started to make a phased recovery, and the apparent demand for rebar last week increased by 870,000 tons to 2.358 million tons. In addition, the direct supply of building materials and the shipment of rebar last week have all increased month-on-month, confirming the marginal improvement of downstream demand. However, the capital repayment still drags the speed of demand recovery, the terminal demand is weak, and the middle and lower reaches of the Yangtze River have entered the plum rain season last week, and it is expected that the apparent demand for rebar in late June will maintain a weekly average level of 2.35-2.4 million tons. Under the condition of phased recovery of demand and slight reduction of supply, the total inventory of rebar small samples went down again last week (decreased by 520,000 tons to 7.757 million tons). The inventory sales ratio dropped to 23 days, but it is still higher than the same period last year (17 days). The steel mill inventory turned from an increase to a decrease (decreased by 757,000 tons to 2.0257 million tons). Looking at the regions, except for the Northeast and Southwest regions, which are still accumulating stocks, the rest of the regions have started to destock, and the current steel mill inventory pressure is not significant. According to the balance table, this week's rebar is slightly de-stocked (less than 1%), and the inventory pressure is not significant. However, there is no obvious driving factor for the obvious improvement of current downstream demand, and the high temperature and heavy rain lead to a clear downward trend in demand seasonally, and the basic contradiction of rebar is gradually accumulating: it is expected that the average price of Shanghai rebar * this week will decrease by 6 yuan/ton compared to last week to 3560 yuan/ton.
Last week, the market's expectations for macro policy weakened, and confidence
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