Cost Support and Demand Pressure Battle: Rise Before Falling, Consolidation Continues [SMM Steel Industry Chain Weekly]

Forecast for next week: Cost support vs. demand pressure tug-of-war; prices likely to rise first then pull back, with consolidation continuing

This week, ferrous metals rose first then pulled back, with coking coal and coke still leading spot gains. The rally was driven by multiple bullish factors: Shanxi coking coal production resumptions fell short of expectations, and high-premium auctions amid hold-back sentiment persisted all week; coke price hikes were implemented one after another, with the fifth round taking effect on September 10, and positive feedback transmitted smoothly; iron ore rose first then fell, with the most-traded I2701 contract surging to 745 on rising crude oil and high hot metal output, before retreating in the second half of the week on news such as the conclusion of long-term contract negotiations. On the rebar supply side, blast furnace mills cut production due to losses and maintenance, while EAF mills resumed production on profits; on the demand side, improved weather and futures volatility helped release some construction material demand. According to SMM statistics, total construction material inventory stood at 7.8727 million mt, down 2.47% MoM, with both mill inventories and social inventories destocking. Fundamentals are repairing, but upward momentum remains insufficient; HRC continued to see a tug-of-war between cost support and demand pressure.
Next week is expected to continue the "cost support vs. demand pressure" tug-of-war: coking coal and coke spot prices are likely to hold up well, and the sixth round of coke price hike negotiations has begun, but rising maintenance at steel mills is accumulating negative feedback risk; iron ore has support from pre-holiday restocking ahead of the National Day holiday, but with notable earlier gains, bearish sentiment, and rumors of concluded long-term contract negotiations, overall prices are likely to consolidate on a subdued note; rebar supply growth is limited, peak-season demand still needs verification, and construction material destocking may slow; HRC consolidation continues, with attention on inventories and end-user purchase volumes. On the operational side, stay cautiously bullish and avoid chasing rallies, with focus on coking coal production resumptions, steel mill maintenance, and marginal changes in end-user transactions before the National Day holiday.

Iron ore: Resistance above, support below; next week likely to consolidate on a subdued note

This week, iron ore shot up then pulled back. The most-traded I2701 contract rose sharply early in the week, then weakened steadily from mid-week. The early-week rally was driven mainly by escalating US-Iran conflict pushing up crude oil, ocean freight rates hitting record highs (the Brazil-to-China C3 route reached $41.12/mt), and the temporary shutdown of Usiminas beneficiation plant in Brazil. However, the actual impact of the shutdown was limited, and prices retreated after sentiment was released. Meanwhile, the fifth round of coke price hikes was implemented this week, deepening steel mill losses. Some inland steel mills halted production for maintenance, hot metal output pulled back slightly, and steel mills nationwide were almost all loss-making, lowering iron ore demand expectations. In addition, rumors of long-term contract negotiations fermented, and the market worried about the release of low-grade ore at ports and increased tradable resources of medium-grade ore, sending futures prices sharply lower amid bearish sentiment.
Looking ahead to next week, ore prices are likely to continue consolidating on a subdued note. The bullish impact of high ocean freight rates has been fully priced in, and the cost support effect is fading; if the sixth round of coke price hikes is implemented, steel mill production cut pressure will increase, and hot metal output may decline at a faster pace; long-term contract negotiations have entered a critical period, and if rumors are verified, it will further pressure ore prices. However, pre-National Day restocking is driving forward spot transaction volumes, and the "September-October peak season" is resonating with policy tailwinds, providing periodic support.Overall, ore prices are most likely to remain in a range-bound tug-of-war. Going forward, focus on the US Fed interest rate decision, long-term contract negotiation results, and changes in hot metal output.

Coke: Steel mill restocking demand remains; coke prices may still have room for hikes next week

Supply side, the coke supply remains tight overall. Coke producers continue to face losses, which suppress production enthusiasm, while sales are relatively good and their own coke inventories keep destocking. Demand side, downstream steel mills still have rigid demand for coke, but their own losses are reducing acceptance of high coke prices. Steel mill coke inventories remain at low levels, forcing them to restock to ensure production continuity. On the coking coal side, Shanxi coking coal production remains at low levels, constrained by high-pressure safety compliance requirements, earlier overproduction depletion, and underground mining conditions, with operations generally maintained at low loads. Coking coal supply remains tight, but high coal prices continue to squeeze industry chain profits. Coke and steel enterprises remain generally weak in profitability, downstream purchasing sentiment is cautious, willingness to proactively increase purchases is insufficient, and resistance to high coal prices is evident. The short-term coke market is likely to consolidate on a strong note. Overall, steel mills have purchasing and restocking needs due to low inventories and rigid demand, and cost support remains in place. Coke prices may still have room for hikes next week.

Steel scrap: Demand continues to improve marginally; short-term prices likely to move sideways

Supply side, high temperatures and heavy rains are gradually subsiding, operating conditions at construction sites and manufacturing enterprises are improving, demolition projects are accelerating, scrap processing bases have returned to normal operations, and market circulation of scrap resources has increased somewhat. Demand side, raw material strength continues, the fifth round of coke price hikes has been implemented, hot metal costs keep rising, and blast furnace steel mills are more willing to use scrap. Meanwhile, EAF steel mills are mostly maintaining per-tonne profits above the break-even line, and electric furnace mills have extended operating hours or resumed production, leading to a slight increase in scrap demand. Overall, the scrap market is currently seeing both supply and demand increase. With the Mid-Autumn Festival and National Day holidays approaching, some steel mills have restocking needs, which supports scrap prices. The short-term scrap market is expected to maintain narrow sideways consolidation, with some upside room before the holidays.

Rebar: Insufficient upward momentum for construction materials; prices expected to consolidate next week

This week, rebar prices rose first then pulled back, with a notable retreat in the second half of the week. Supply side, electric furnace mills still see some profitability from off-peak power production, and some have slightly extended operating hours; on the blast furnace side, the fifth round of coke price hikes was implemented mid-week, costs continued to rise, and blast furnace mills' losses on rebar production widened somewhat. Production enthusiasm is low, with some mills conducting maintenance and cutting production, resulting in a slight overall supply decline. Demand side, as the impact of high temperatures and heavy rains gradually weakens, construction site work pace has picked up slightly, and construction material demand has been released to some extent. With supply falling and demand rising, both mill inventories and social inventories accelerated destocking this week. Looking ahead, the tight supply pattern of coking coal and coke is hard to change, and there are still expectations for another round of price hikes. Rebar cost support is strong, but overall upward momentum remains insufficient. Therefore, spot prices are expected to face difficulty moving either up or down next week, maintaining a range-bound consolidation pattern.

HRC: Cost support combined with demand pressure; HRC prices expected to consolidate at current levels next week

This week, HRC prices weakened compared with the previous week, and overall transactions deteriorated. Supply side, the impact from rolling line maintenance decreased MoM this week, and overall HRC production rebounded. Demand side, apparent demand rose MoM this week, but September-October peak season demand has not yet fully materialized. Inventory side, this week SMM statistics showed HRC social inventory at 86 warehouses nationwide (large sample) at 4.6625 million mt, up 21,100 mt MoM, or up 0.45% MoM, and up 28.06% YoY. By region, except for a slight destocking in the North China market, all other regions saw inventory buildup. Cost side, the fifth round of coke price hikes was implemented this week. Looking ahead, the sixth round of coke price hike negotiations has begun, and HRC cost support remains. Combined with steel mills' current losses, mills are maintaining a relatively firm stance on prices, and downside support is strong. Although restocking demand is expected before the Mid-Autumn Festival and National Day holidays, current peak-season demand has not been verified, making it difficult for prices to rise sharply under demand pressure.HRC prices are expected to consolidate at current levels next week, with the most-traded contract estimated to trade in the 3,280-3,390 range.

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