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[institutional Review] the cost of steel has moved down and the price will still fall when the demand is insufficient.
Sep 18,2020 15:20CST
Source:Bank of China International Futures Hu Ziqi
The content below was translated by Tencent automatically for reference.

SMM News: this year's steel prices benefited from the sharp rise in upstream iron ore prices and domestic demand support and strong performance. However, since the start of the traditional peak season in September, the mediocre performance of the downstream market has weakened demand support. At the same time, with the recent fall in raw material prices due to supply-side repair, steel production costs are expected to benefit from lower production costs or keep steel supply high, or steel prices continue to fall against the backdrop of insufficient demand.

I. the cost of raw materials has come down, and the supply of steel has remained high.

Since the beginning of this year, the high price of iron ore and the reduction of domestic environmental protection restrictions on the production of steel mills have made the production profits of steel mills continue to decline. By the middle of September, the profit per ton of long-process rebar steel is basically 50 yuan / ton, which limits the enthusiasm of steel production to a certain extent, and superimposes the impact of production restrictions in some areas, resulting in a slight contraction of steel output. Survey data show that although the output of construction steel in the sample steel mills increased by 26000 tons month-on-month on Sept. 17, it was still the second lowest since mid-May. However, with the recent fall of iron ore prices from the high of the year, the reduction of cost pressure on long-process steel mills is expected to stabilize or promote a rebound in steel supply in the later period.

From the perspective of the raw material market, shipments of Brazilian mines, which previously restricted iron ore supply, increased significantly in September, showing that the bottleneck of transport in Brazilian ports is no longer there, but also confirms that Vale's supply has been substantially repaired. Judging from Vale's plan to produce 310 million tons a year and only about 64 million tons in the second quarter, achieving the planned target this year will lead to an average quarterly production increase of more than 30 per cent in the second half of the year compared with the second quarter, thus greatly alleviating the shortage of raw material supply and helping to improve the profitability of steel mills.

Figure 1: quarterly production of Vale (in kilotons)

In terms of blast furnace start-up and hot metal output in steel mills, the blast furnace operating rate of 247 sample steel mills decreased by 0.26 percentage points to 90.63% in the week of September 18, and hot metal output decreased by about 1700 tons to 2.5087 million tons. The two are 2 percentage points and 23000 tons lower than the year's highs set in mid-August, respectively. It means that from a capacity point of view, steel mills have room to increase production, and without considering the disturbance of production restrictions, the improvement in profitability of steel mills is expected to boost the recovery of molten iron production and steel supply.

Chart 2 average daily output of blast furnace molten iron in 247 steel mills (unit: 10,000 tons)

From the point of view of the electric furnace steel market, although the electric furnace production is near the profit and loss line, the price of scrap has also fallen recently. at the same time, the supply rebound brought about by long-process profit improvement can offset the supply shortage caused by the later production reduction of electric furnace. this means that the overall supply of steel may continue to remain at a high level.

In fact, from the domestic construction steel transactions announced by Mysteel, there has been no significant improvement in construction steel transactions since the peak season in September. Trading volume of construction steel fell by 4000 tonnes to 223900 tonnes in the week ended Sept. 11, while the volume in the first four trading days of the week was about 10, 000 tonnes lower than in the same period of Sept. 11. At present, the overall transaction performance is worse than that in April and May this year, or even less than some periods in July and August, while the steel output is significantly higher than that in the first half of the year. In addition, the recent precipitation in some parts of the country has also affected the downstream construction and the corresponding steel sales. However, even if the late demand may still improve in stages, but in the context of the decline in new real estate construction and the weakening of current macro expectations, the room for continuous improvement in demand may also be limited.

Chart 4: weekly turnover of domestic construction steel (unit: 10,000 tons)

III. Cost improvement to maintain supply, insufficient demand or lower prices

Overall, the cost of steel on the supply side fell due to the fall in raw material prices and improved the profitability of steel mills. At the same time, as the current production level of steel mills has fallen from the previous high, it means that the improvement in profitability can promote the expansion of steel market supply.

On the demand side, the contraction of new real estate construction area at the terminal level and the slowdown in the growth rate of infrastructure investment make the demand outlook poor. At the same time, domestic steel sales are mediocre after entering the peak season, and the slow pace of elimination of steel inventory also shows that demand is relatively insufficient. In view of the downward movement of raw material costs or prompting steel mills to maintain a high level of supply, while demand is still facing the risk of weakening, steel prices are expected to fall in the future.

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