In the short term, ferrous metals will remain under pressure [SMM Steel Industry Chain Weekly Report]

Forecast for next week: Ferrous metals remain under pressure in the short term

This week, ferrous metals edged higher before continuing to pull back, with coking coal seeing the largest pullback. At the beginning of the week, the National Development and Reform Commission (NDRC) and other departments issued a notice on launching a three-year campaign to promote energy conservation and carbon reduction in key industries, and the US and Iran were to sign a memorandum of understanding on the 19th. Market sentiment improved, and ferrous metals all rose. In the second half of the week, the futures market priced in the expectations for the eighth round of coke price hikes. As steel mill profits narrowed further, after the spot market had largely priced in the eighth round of price increases, the room for further increases was limited. Coupled with the emergence of expectations that hot metal output had peaked, futures began to pull back, and cost support weakened. Meanwhile, the May macro data came in below expectations, causing ferrous metals to decline across the board. In the spot market, the spot-futures price spread for HRC narrowed somewhat during the week, attracting some speculative demand, while the spread for rebar widened. End-users purchased as needed, with no significant restocking before the holiday.

In the short term, according to SMM survey tracking, daily average hot metal output rose by 5,300 mt WoW this week. Expectations that hot metal output has already peaked have emerged, weakening demand support on the raw material side. Combined with increasing iron ore supply, iron ore still faces some downside expectations. Some leading coke producers have initiated the eighth round of price hikes, but further price increases will face greater difficulty. In the short term, cost support has slightly weakened. On the steel side, off-season factors are deepening, and the supply-demand imbalance of finished steel will continue to accumulate. In addition, new low-priced resources have flowed out from Southeast Asia and the Middle East recently, narrowing the advantage in the price spread between Chinese and overseas markets and making export orders more difficult to secure. On the whole, cost support has slightly weakened, and finished steel has followed suit in pulling back. Later pressure will focus on the off-season demand situation, and the market may remain under pressure in the short term.

Iron ore: Hot metal inflection point appears & cost support weakens, prices will continue to hit bottom

This week, the iron ore market continued its downward trend, with the most-traded contract falling by up to about 2.61% during the week. Looking ahead to next week, after the eighth round of coke price hikes is fully realized, steel mill losses will intensify, and some mills will begin blast furnace maintenance plans. It is expected that hot metal output will start to decline next week, and iron ore demand will deteriorate. Supply-side pressure will continue to increase, and port inventories are expected to accumulate further. In addition, as crude oil prices decline, iron ore ocean freight rates still have significant downside potential. With supply increasing and demand declining, coupled with weakening cost support, iron ore prices are expected to hit bottom further next week.

Coke: Strong cost support, eighth round of price hikes expected to materialize next week

In terms of supply, due to the continuous impact of safety inspections in Shanxi, coking coal supply remains tight. Moreover, the increase in coking coal prices has consistently outpaced that of coke, leaving most coke producers still operating at a loss. These producers are voluntarily intensifying production restrictions to reduce losses, and coke supply is showing a downward trend in the short term. On the demand side, steel mill operating rates remain high, and due to tight coke supply, coke inventory replenishment at mills has fallen short of expectations, leaving mills with ongoing restocking needs for coke. As for coking coal, coal mines are resuming production slowly, keeping coking coal output still at relatively low levels with relatively insufficient supply. Combined with intensified safety inspections during June’s Safety Month, supply continues to be tight. Driven by news of the eighth round of coke price increases, downstream coke and steel enterprises and traders have been purchasing actively, and coal mine inventories are low, resulting in undersupply. Coking coal prices are still expected to rise, with some low-sulphur coking coal in the Linfen area already up another 60 yuan/mt. In summary, the eighth round of coke price increases has been proposed, supported by multiple positive factors, and is expected to be implemented. The coke market will hold up well in the short term.

Steel Scrap: Tightening Supply and Weakening Rigid Demand Converge, Prices May Show a Fluctuating Trend

On the supply side, tax policies have been tightening, making invoiced resources increasingly scarce. Recent persistent heavy rainfall across many south China regions has slowed construction progress, reducing steel scrap generation and tightening overall scrap circulation. On the demand side, EAF steel mills’ per-tonne steel profits are near the break-even line, and these mills mostly maintain medium-to-low operating hours, procuring scrap mainly on an as-needed restocking basis. For blast furnace steel mills, although the price spread between steel scrap and hot metal has narrowed recently, scrap costs remain higher than hot metal, making it difficult to drive a substantial increase in the scrap usage ratio. Overall, the steel scrap market shows a weak supply-demand pattern, and short-term scrap prices are expected to fluctuate.

Rebar: Insufficient Fundamental Drivers, Downward Pressure Still Present at the Bottom

Rebar prices fluctuated downward this week, with the nationwide average price at 3,167 yuan/mt, down 24 yuan/mt from last Friday. On the supply side, some EAF steel mills resumed production, and agent purchases increased in stages, with some mills seeing intermittent slight increases in operating hours, leading to a marginal rise in overall production. Meanwhile, most blast furnace steel mills remain marginally profitable and keep production at previous levels. On the demand side, some demand was restricted earlier during the college entrance exam period and has been gradually released recently. The phased price rally early in the week also triggered some speculative demand, and trading was moderate. However, from mid-week, futures weakened and market trading turned sluggish. Additionally, as south China enters the rainy season, demand releases will remain constrained in the short term. In terms of inventory, total inventories declined this week, with plant inventory slightly increasing and social inventory destocking. After price drops, agents slowed their purchases. Considering the gradual arrival of the demand off-season, inventories will enter an accumulation phase. It is understood that the eighth round of coke price increases has been initiated, but iron ore continues to offer margins, leaving some mills still profitable and making active production cuts unlikely for now. However, profitability varies by region, with north China mills’ margins trailing those in east China. Production conditions will continue to be monitored. Overall, during the demand transition between peak and off-seasons, the rebar supply-demand imbalance will gradually come to the fore, and its own drivers are not enough to support price stability. It will continue to follow the impact of raw material market news. The spot price is expected to remain under downward pressure next week.

HRC: Off-season plus weakening cost support, likely in the doldrums next week

Cold-rolled and hot-rolled prices weakened this week, with overall transactions edging down slightly WoW. Supply side, rolling line maintenance decreased WoW, leading to a smaller impact on output, and overall HRC production edged up slightly. Demand side, apparent demand posted a slight WoW increase. Inventory side, SMM data showed this week’s HRC social inventory across the 86 warehouses nationwide at 4.2266 million mt, down 74,800 mt WoW, a drop of 1.74% WoW. By region, destocking in South China and Northeast China slightly outpaced that in North China and Central and East China markets. Cost side, both coking coal and coke futures and iron ore futures weakened this week. In the spot market, the 7th round of coke price increases was implemented, while iron ore prices weakened. Looking ahead, the 8th round of coke price increases is expected to be implemented next week, with subsequent increases facing greater difficulty. Hot metal production is expected to peak while iron ore supply is expected to increase later, thus iron ore prices are expected to be in the doldrums. Overall, cost support is expected to weaken compared to before. For HRC fundamentals, although the current supply-demand imbalance is not yet prominent, off-season demand weakness still drags on prices. HRC is expected to be in the doldrums next week, with the most-traded HRC contract moving in the 3,300-3,390 range.

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