Cost Support and Hidden Concerns Coexist; Ferrous Metals May Continue to Consolidate on a Strong Note Next Week [SMM Steel Industry Chain Weekly Report]

Forecast for next week: Cost support coexists with hidden concerns; ferrous metals may continue to consolidate on a strong note next week

This week, ferrous metals mostly showed a first-rise-then-fall pattern, yet still posted certain MoM gains overall, with coking coal and coke leading the gains and finished steel following higher. The core driver of the rally was a confluence of bullish factors. First, supply-side disruptions in coking coal dominated, as production resumptions in Shanxi fell severely short of expectations and supply remained tight. Mines held back from selling, and auctions cleared at high premiums, quickly materializing the cost-push logic. Second, cost support moved up in steps: the fourth round of coke price hikes was implemented on September 3, iron ore coarse fines saw destocking for two consecutive weeks, and news of the Minas mine suspension boosted iron ore prices. Combined with hot metal output rebounding to a daily average of 2.408 million mt, demand-side support for raw materials remained intact. After the early-week rally, the China-Mongolia heads-of-state meeting, where the two sides exchanged views on border port railway construction and other issues, sparked concerns that Mongolian coal supply may gradually recover. This capped gains in coking coal and coke futures, and other ferrous metals followed with pullbacks. By product, construction steel saw intensified losses at long-process mills, dampening production enthusiasm, with overall production contracting in phases and supply tightening marginally. Sheets & plates remained mired in inventory accumulation, with peak-season demand yet to be effectively verified.
Looking ahead to next week, the market is expected to maintain a cost-driven strong pattern in the short term, but risks of retreat after rapid rise are building. Coking coal production resumptions are falling short of expectations, and tight supply remains hard to resolve, providing solid cost support. After the coke price hike took effect, the tug-of-war between coke and steel intensified, with coke producers cutting production and holding back from selling amid losses while steel mills pressed for deliveries. If this continues, the cost center will keep shifting higher. Iron ore is being squeezed by steel mills pushing for lower prices and coke price increases, making spot cargo more likely to fall than rise, with the uptrend slowing or shifting to sideways movement. Meanwhile, steel mill losses are widening, and some are already considering production cuts. September hot metal production resumption growth may be discounted, and demand-side support for raw materials may fall short of expectations. On the other hand, end-use demand in the peak season still awaits verification, with limited volume release. Current demand is largely speculative, and end-users have limited acceptance of high-priced resources. Therefore, SMM expects next week to show coking coal and coke on a strong note, with rebar and hot-rolled coil consolidating in line with costs. On the operational side, remain cautiously bullish and avoid chasing highs, with focus on the pace of coking coal production resumptions and marginal changes in end-use transactions.

Iron ore: Widening steel mill losses cap ore prices; iron ore price uptrend expected to slow next week

This week, iron ore prices consolidated on a strong note, with the most-traded I2701 contract hitting an intraday high of 731.5 yuan/mt. This rebound was driven by multiple factors rather than a single catalyst. First, BHP's labor negotiations at Port Hedland reached an impasse, creating expectations of supply tightening in sentiment. Meanwhile, freight rates on major routes remained elevated amid Middle East tensions, and higher import costs further reinforced the price floor. Second, with the traditional "September-October peak season" approaching, coupled with notable port inventory destocking this week and steel mill inventories falling by more than 1 million mt, the market held expectations for a September restocking rally, lifting sentiment. Third, coking coal and coke prices rose sharply this week, with the fourth round of coke price hikes fully implemented, driving finished steel prices higher. Iron ore, as a raw material, followed passively higher, also providing some boost to ore prices. Overall, this round of iron ore rebound was strongly supported by sentiment and the cost side, but the driver was more of a "follow-the-rally" nature. The fundamental pattern of strong supply and weak demand has not fundamentally reversed, limiting the rebound's upside. Future trends will hinge on the pace of end-use demand release and supply-side developments.
Looking ahead to next week, on the supply side, as maintenance at Australian and Brazilian ports gradually wraps up, combined with the usual Q3-end shipment push by overseas mines, shipments are expected to accelerate their rebound. Meanwhile, steel mills have already begun pre-National Day holiday restocking, with forward spot transactions seeing a surge in volume, and the overall supply-side growth is trending toward acceleration. On the demand side, four consecutive rounds of coke price increases have significantly squeezed steel mill profits, pushing the industry to the brink of widespread losses. Some high-cost steel mills are facing cash flow distress, with rising blast furnace maintenance and production halt plans exerting clear downward pressure on iron ore demand. Under the pattern of strong supply and weak demand, iron ore prices face mounting resistance to the upside, but downside support remains intact: labor negotiations at BHP's Port Hedland are scheduled to resume on September 8, and if they stall again, supply tightening expectations will strengthen. At the same time, ocean freight rates fluctuating at highs are also lifting the floor of ore prices from the cost side. In addition, the market still holds expectations for the September-October peak season; combined with pre-National Day stocking demand and the resonance of recent macro tailwinds, ore prices still do not lack upward drivers. In summary, the tug-of-war between longs and shorts is expected to intensify significantly next week, and iron ore prices are prone to a repeated consolidation pattern.

Coke: Losses combined with production cuts, coke producers remain fully willing to push for further price increases, coke market to hold up well next week

In terms of supply, coking costs continue to rise. After the fourth round of coke price increases took effect, most coke producers remain in a state of significant losses, and coke supply continues to decline. Coupled with strong downstream purchasing enthusiasm, coke producers' in-factory inventory is accelerating its drawdown. On the demand side, downstream steel mills' daily average hot metal production is fluctuating at highs, creating strong rigid demand for coke. Moreover, due to high daily coke consumption and delayed coke arrivals, steel mills' own coke inventories continue to decline, prompting them to urge faster deliveries. However, rising costs have intensified steel mill losses, and some steel mills have begun blast furnace maintenance, raising the risk of negative feedback on the demand side. As for coking coal, safety inspections in Shanxi remain under intense pressure, and coal mine production resumptions are severely lagging expectations. As of early September, a large number of coal mines in Shanxi remain in a halted state, and expectations for a significant near-term increase in coking coal supply are low. In addition, Mongolian coking coal, an important supplement, has seen its border clearance volumes remain at low levels recently, with existing inventory at the Ganqimaodu port continuing to draw down. The coking coal market is likely to hold up well next week. In summary, the coke spot market is expected to continue holding up well next week, and there remains a considerable likelihood that the fifth round of coke price increases will take effect.

Steel scrap: Improving cost-effectiveness of scrap usage, prices likely to drift higher in the short term

On the supply side, after the easing of high-temperature weather, the release of scrap recycling resources still requires a process, while the tight invoice issue has shown no clear signs of improvement. On the demand side, as the traditional peak season for finished steel demand approaches, steel mills are strengthening their restocking demand. Among them, blast furnace steel mills, with coke and iron ore prices continuing to strengthen, are seeing scrap cost-effectiveness steadily improve, and scrap usage is likely to increase. EAF steel mills, benefiting from the lagged rise in scrap prices this week, have seen improved margins and are showing greater enthusiasm for scrap procurement. Overall, supply-demand fundamentals are expected to keep improving, and steel scrap prices are likely to drift higher in the short term.

Rebar: Profitability diverges between long and short processes; raw material side may still push finished steel prices higher

This week, rebar prices continued to hold up well, rising to highs early in the week before pulling back slightly in the latter half. On the supply side, the fourth round of coke price increases was implemented, costs continued to climb, and steel mill profitability showed no improvement. Most producers maintained previous production levels, but a few mills in north China reduced output through banking furnaces due to losses, leading to a slight decline in wire rod production. Recently, electric furnace mills have been marginally profitable on off-peak power, and some have slightly extended operating hours, but production on flat-rate power remains loss-making, so upside room for output growth is limited. On the demand side, speculative demand increased this week amid the market rally, but actual downstream demand release fell short of expectations, leaving overall demand still mediocre. On the inventory front, mill inventories and social inventories continued to destock this week, though the pace of mill inventory decline slowed, and actual cargo pick-up speeds by agents and direct-supply projects were unremarkable. Looking ahead, with steel mills suffering losses, their willingness to purchase raw materials at high prices is waning, keeping near-term supply growth relatively controllable. On the price front, rebar fundamentals are currently not strong enough to support a rapid spike in spot prices, and price movements will continue to revolve around coking coal and coke prices. With the tight supply pattern for coking coal and coke unlikely to change, spot prices are still expected to see further hikes next week, with near-term focus on demand realization.

HRC: Costs still provide support; demand awaits volume release; HRC prices likely to consolidate at highs next week

This week, HRC prices drifted lower, market sentiment cooled somewhat, and overall trading activity underperformed last week. In terms of supply, rolling line maintenance changes were relatively small this week, and overall HRC production edged up slightly. In terms of demand, manufacturing is recovering slowly, but the seasonal demand surge has yet to materialize, leaving overall HRC demand lackluster. On the inventory front, SMM data showed HRC social inventory at 86 warehouses nationwide (large sample) stood at 4.6413 million mt this week, up 10,500 mt WoW, or up 0.23% WoW. By region, east China and south China saw modest destocking, while central China, north China, and north-east China continued to see inventory buildup. Looking ahead, there are expectations for a fifth round of coke price hikes next week, but iron ore prices face upward pressure from steel mills pushing for lower prices, so overall HRC costs still have support. From the demand side, with the September peak season arriving, HRC demand is expected to improve, providing some upward momentum, but given the current slow pace of demand recovery, support for a sharp price rally remains insufficient. In summary, the most-traded HRC contract is expected to trade in the 3,350-3,430 range next week.

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