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Booming supply and demand and cost-driven black system will still be driven upwards in the second half of the year.
Jul 13,2020 09:01CST
translation
Source:China Investment Anxin Futures
The content below was translated by Tencent automatically for reference.

SMM News: domestic terminal consumption strong recovery steel export reflux continues to exist

Although infrastructure and real estate have led a strong recovery in steel terminal demand, there is still controversy in the market as to whether the exuberant steel demand in May is the compression effect caused by concentrated work after the impact of the epidemic, and there are still doubts about whether the strong demand can continue in the second half of the year. The core disagreement lies in the judgment of real estate.

The author believes that, on the one hand, the market liquidity environment continues to be loose, and the boost to real estate sales is still in the weak transmission. Recently, real estate sales data have shown a strong rebound. In June, the transaction area of commercial housing in 30 large and medium-sized cities has been repaired to 9.4% compared with the same period last year, and the cumulative year-on-year growth rate from January to June has also been further revised to-18.5%. This has led to the rebate and reinvestment of the real estate industry.

According to the data from January to May, the total investment in real estate development across the country decreased slightly by 0.34% compared with the same period last year, while the new housing construction area and completed housing area were repaired to-12.85% and-11.3% respectively. In the current real estate completion cycle, there is still inertia in real estate construction, and the continued pick-up in sales has given a boost to new construction. It is expected that new real estate construction and the cumulative year-on-year growth rate of construction will become positive in the second half of this year, and the demand for steel will remain at a level of about 4% compared with the same period last year.

On the other hand, the second half of the year is the period when infrastructure investment will really boost this year. The cumulative year-on-year growth rate of infrastructure investment from January to May has been repaired to-3.31%, and the pulling effect of infrastructure projects dominated by Xiongan construction on steel demand in North China is particularly significant. According to the year-on-year increase of 1.6 trillion yuan of local government special debt this year, and the fiscal deficit of at least 1 trillion yuan compared with the same period last year, and the plan to issue 1 trillion yuan of special treasury bonds to fight the epidemic, the author estimates that this year's (traditional) infrastructure investment may grow at about 4%. This means that (traditional) infrastructure investment will grow by 8% in the second half of the year compared with the same period last year, and validates the view that infrastructure investment will further boost steel demand in the second half of the year.

As for manufacturing, its overall recovery is less than that of infrastructure and real estate. According to the proportion of product exports, the degree of repair is also significantly different. For example, the cumulative growth rate of production and sales of excavators and heavy trucks linked to domestic engineering projects increased strongly to 14.7% and 12.4% from January to May, while the cumulative output of cars and household appliances linked to household consumption remained negative from January to May compared with the same period last year, and both maintained a decline of more than 10%. Although it is a high probability event for the manufacturing industry to maintain negative growth in production and sales for the whole year, driven by tax and fee cuts and industrial policies, the export of superimposed products will pick up slightly, and the demand for steel in the manufacturing industry will still improve slightly in the second half of the year.

In terms of steel exports, China exported a total of 25 million tons of steel from January to May, down 14.1 percent from the same period last year, while net exports of steel and billets totaled 16.74 million tons, down 29.7 percent from the same period last year. After the supply-side reform, China's steel exports continue to weaken due to the weakening of cost advantages, coupled with the significant overseas epidemic and continuous impact on the terminal demand of steel products, so steel exports are still not optimistic this year. The author expects that the problem of export return will still be a periodic drag on the domestic steel price trend, the import impact will weaken after the fourth quarter, and the net steel export is expected to maintain a decline of nearly 30% for the whole year.

Iron and steel replacement capacity release delayed short process electric arc furnace regulation supply

In order to analyze the steel supply in the second half of the year, the author combs the national steel replacement capacity plan for 2020 issued by the local Ministry of Industry and Information Technology. According to incomplete statistics, through capacity replacement this year, the country plans to build 58.43 million tons of ironmaking capacity and 71.93 million tons of steelmaking capacity, and it is necessary to withdraw 67.65 million tons of ironmaking capacity and 82.72 million tons of steelmaking capacity accordingly. However, the author found that there is not much steel replacement capacity actually put into production in the first half of this year. Among them, the newly built blast furnace + resumption of ironmaking capacity is about 12.5 million tons, while the new production capacity of short-process electric arc furnace is about 3.7 million tons, and the production progress is far lower than expected. The reason for the collective delay in steel replacement capacity is caused by the epidemic affecting the progress of the project, large capital investment, capacity policy changes and other reasons. Looking forward to the second half of the year, the progress of steel replacement capacity (especially electric arc furnace capacity) will be accelerated month-on-month, but the overall delay is expected to continue.

Let's take a look at the actual output of production capacity. According to the average daily output data released by the China Iron and Steel Association, the national average daily output of crude steel reached 2.93 million tons in June, setting a new high again, up 3.6 per cent from last year's peak and 5 per cent year-on-year for pig iron. Under the background that the profit level of steelmaking is not high, the average daily production capacity of iron and steel has increased so significantly, which shows that the steel supply capacity is still in an abundant state. Of course, after entering the second half of the year, the impact of environmental protection on production limit and capacity removal of steel mills will be higher than that in the first half of the year, but the impact of environmental protection on steel production, especially on blast furnace production this year will be significantly smaller than in previous years.

The national steel production capacity will still be sufficient in the second half of this year, which means that there is little possibility of a big rise in steel prices driven by demand, but does it mean that there is a surplus of steel supply? Among them, it will still mainly rely on short-process steel mills to provide the adjustment of steel marginal supply to hedge against the significant steel oversupply caused by the periodic weakening demand. With the production capacity of new electric arc furnaces and converters put into operation this year, and the increase of scrap processing bases and traders, the overall tight pattern of scrap resources across the country is still difficult to reverse, and the performance of scrap prices will be relatively strong. This means that the long-process steel mills with hot metal as the main raw material will still maintain the cost advantage compared with the short-process steel mills with scrap as raw materials, that is, the electric arc furnace with the characteristics of flexible regulation of output will still be the main force to adjust the excess supply of steel.

Overall, the steel market as a whole is in a pattern of booming supply and demand in the second half of the year. Domestic steel demand is expected to increase by about 1.6% year-on-year and 4.3% month-on-month; net steel exports are down about 26% year-on-year and 17% month-on-month; and steel supply is expected to increase by about 2.5% year-on-year and month-on-month. In this pattern, after the off-season adjustment, the steel price will return to the trend of strong oscillation, and the cost of electric arc furnace still constitutes a strong cost support for steel.

Coke is still disturbed by capacity loss. There is still room for speculation on the supply side.

After coking capacity loss in many places last year, coke supply showed a slightly tight pattern in the first half of this year. Of course, similar to iron ore, the strong demand for blast furnace is also the main reason for the strong performance of coke. Judging from the current blast furnace capacity utilization rate of about 86%, the demand for coke and iron ore in domestic blast furnace production has basically peaked, but the overall operation will remain at a high level in the second half of the year.

In addition, although the proportion of China's coke exports is less than 2%, this year coke begins to show signs of changing from net exports to net imports. From January to May, exports of coke and semi-coke totaled 1.45 million tons, down 58.2 percent from the same period last year, while coke imports totaled 527000 tons, with the main source countries being Japan, Poland, Australia and so on. Purely from the caliber of metallurgical coke, China has changed to the state of net import in June.

The core of the coke market in the second half of the year still lies in the policy disturbance on the supply side. The production of coking replacement capacity is also similar to that of iron and steel, and the progress has been delayed. According to incomplete statistics, the capacity of coking replacement plus resumption of production in the first half of the year is about 10.28 million tons, which is slower than expected; in the second half of the year, it is estimated that about 24.15 million tons of coking capacity will be put into production, but according to the assessment of the delayed progress, the state of full production may be delayed to 2021. The capacity reduction plan completed about 5.3 million tons in the first half of the year (and about 6.15 million tons of coking capacity in Xuzhou to be eliminated), and it is expected that there will still be 29.25 million tons in the second half of the year, mainly after October. In combination, the production impact of the new coking capacity has been delayed, and the disturbance of capacity loss in the second half of the year still exists, so there is still room for speculation on the coke supply side, and it is expected that there will still be upside drive after a slight correction in the off-season.

If coking coal is to form a supplementary rising trend, it still needs to be further reduced in coal mine production.

Coking coal is the weakest in the ferrous metal industry chain in the first half of the year. The pattern of oversupply is obvious and is severely impacted by imported coking coal. In fact, Australian metallurgical coal export data show that exports fell 2% from January to April compared with the same period last year, but metallurgical coal exports to China soared nearly 70% year-on-year. The reason is that Japan, India, South Korea and other major Australian metallurgical coal importers have been significantly and continuously affected by the epidemic, which has dealt a heavy blow to Australian metallurgical coal prices. Australian coking coal prices fell to their low levels at the end of 2015 before rebounding recently.

Considering that China imported 149 million tons of coal and lignite from January to May, which has reached half of the import volume of the whole year last year, the import of coal customs clearance resources in the second half of the year is even more tense. In addition, with the slow recovery of manufacturing industry, the impact of imported coal from Australia will be significantly reduced in the second half of the year. The month-on-month ratio of Mongolian coal will rise in the second half of the year, but at present, the profit is not good, and there is no volume of imports. According to the current level, the increase of imported coal from Mongolia in the second half of the year is basically offset by the reduction of imported coal from Australia, with a month-on-month increase or a slight increase, but there is little possibility of further low-price impact.

The rapid resumption of production after the domestic coal mine epidemic, and then to maintain a high yield is the root cause of the pattern of oversupply of coking coal. At present, the profit level of domestic coking coal mines is OK, the operating rate is still high, and the product inventory is also tired to a high level. In such a pattern of oversupply, coking coal mines completely rely on downstream coking plants and steel mills to replenish the stock in order to achieve a small removal of storage, and the pressure is significant. According to the previous analysis, the coking plant is still disturbed by factors such as capacity loss and environmental protection in the second half of the year, and the demand for coking coal production and replenishment has not increased. Therefore, it is necessary for domestic coking coal mines to actively and passively reduce production in order to realize the drive of coking coal price increase. According to the law of previous years, coal mines will enter a period of frequent safety policy after the end of the third quarter, so it is expected that the pressure on domestic supply of coking coal in the second half of the year is less than that in the first half of However, in order to get rid of the surplus pattern and form a supplementary upward trend, further production reduction actions at the domestic coal mine end are needed, otherwise coking coal prices can only form a weak upward pattern.

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