Weekly Steel Market Observation: Black Series Commodity Prices, Correction After Over-correction But Fundamental Pressure Remains

Last week, although the average price of various black commodity varieties continued to fall, the decline significantly narrowed. After two weeks of rapid price decline, the market's bearish sentiment was released: among them, the iron ore price index fell from a minimum of $122/ton to $103/ton, creating a 15% drop. The mainstream view in the market is that the iron ore price is undervalued and may have hit bottom in the short term, but there is still a lack of confidence in its rebound space.

After a rapid decline, the market sentiment of black series commodities took a breath and repaired, but due to the lack of new favorable drivers in the fundamentals, the market price may return to the downtrend after a short and small rebound, and the possibility of breaking the previous low is not ruled out.

The decline in black series prices this round is partly due to the weakening of steel demand in the off-season, and the accumulation of rebar has begun. However, when analyzing the price changes across varieties, the iron ore drop is much greater than the steel drop, indicating that the role of the market sentiment weakening in the domestic and foreign markets in this round of decline cannot be underestimated: In May, the market hype that represented the bull market of bulk commodities such as non-ferrous metals was interrupted, dragging down the iron ore drop more than the steel price drop, reflecting the international market attribute of iron ore.

In the middle and late June, the Chinese and foreign markets will be in a period of policy and data observation, and the impact of some unpublished data or possible policy moves has been digested by the market expectations. Therefore, the price changes driven by sentiment will gradually transition to market fundamentals driven. Under the pressure of high supply and weak downstream demand, the black series price may weaken again, for the following reasons:

1. There is still room for the cost of electric furnace valley electricity to decline. Recently, the supply of scrap steel has gradually increased with the smooth progress of the "reverse invoice" policy, suppressing the rise of scrap steel prices (some steel mills in the East China region plan to continue to reduce the price of scrap steel), and the cost of the electric furnace valley electricity, which is the lowest cost of rebar production, is about 3510 yuan: the cost bottom support of 3600 yuan for rebar prices is not solid;

2. Under the high supply of iron water, steel mills continue to accumulate stocks and may take the initiative to reduce production. In the past two weeks, the accumulation of steel stocks was mainly concentrated in the factory warehouses of steel mills: currently, the inventory of the five major materials in the steel mill factory has exceeded the same period last year. Under high supply, steel mills continue to accumulate stocks, coupled with the squeeze of steel production profits, steel mills may take the initiative to reduce production, and then lower the raw material prices again, causing the cost of steel to move down and start a new round of negative feedback;

3. The demand for steel in the downstream is still weakening. In the past two weeks, affected by weather, college entrance examination and environmental protection, the demand for rebar has continued to fall beyond expectations. Although the impact of the college entrance examination has ended, it is understood that the Shanghai environmental protection inspection will continue until June 20, coupled with the heavy rain in the south and the abnormal high temperature in the north, the demand is hard to say. At the same time, the research of Mysteel continues to feed back that the shortage of funds on the site is still the biggest bottleneck in forming and ensuring the physical workload;

4. The external environment's weak trend has not changed. Although there is no relevant data released recently abroad, the EU plans to impose a maximum tariff of 38.1% on Chinese electric vehicle imports, and the probability of the Federal Reserve only cutting interest rates once this year has increased, and the external macro environment continues to weaken.

At present, the market is still bearish factors more than bullish factors. Therefore, the core of the current price increase of the black series is the repair rebound after over-correction. From the perspective of the fundamentals, the black series price will remain weak and fall before the high supply pressure is fully relieved or the demand side improves significantly.