[SMM Operating Rate at Steel Rolling Mills that Rely on External Steel Billets] Losses Dragged Down Operating Rates, Production Hardly to Improve

According to the SMM survey, as of June 27, the operating rate of steel rolling mills that rely on external steel billets, which mainly produce rebar, was 20.93%, down 7.79 percentage points from the end of May and down 5.07 percentage points YoY.

In June, the average price of construction steel showed a fluctuating downward trend, with prices falling by 218 yuan/mt MoM. By the end of June, the nationwide average price hit a new low for the year, and market sentiment was pessimistic.

Supply side, coastal blast furnace-based steel mills' marginal benefits are roughly at the breakeven point, while many inland steel mills are experiencing losses. In June, steel mills maintained low inventory levels, and cash flow pressure was minimal, allowing them to sustain previous production levels. Electric arc furnace-based steel mills generally faced slight losses, mainly because the decline in steel scrap prices was less than that of finished products, making it difficult to collect steel scrap. Some steel mills have gradually reduced operating hours. Additionally, in July, peak electricity periods in some regions were adjusted, and some steel mills still expect to reduce operating hours. Steel rolling mills that rely on external steel billets are experiencing production losses, and in east China, the rainy season has impacted demand. As a result, rolling mills temporarily reduced operating hours and switched to producing different types of steel products.

Demand side, in June, high temperatures in the north and the flooding season in south China slowed down construction progress. Additionally, banks had requirements of semi-annual collection of receivables, leading to tight downstream funds and significantly limited demand. Although the market is entering the traditional off-season, the demand outlook for July is better than June. On one hand, the flooding season in south China will end in early July, leading to a release of demand. On the other hand, the tight funds situation may improve later.

Looking ahead, the profit margins of steel rolling mills that rely on external steel billets will deteriorate. Together with low demand, steel mills are not highly motivated to produce, and it is highly likely that they will maintain production. It is expected that the operating rate of steel rolling mills that rely on external steel billets will move rangebound in July.