SMM: welcome to the black strategy conference co-sponsored by Shanghai Futures Exchange and CITIC Futures. Recently, ferrous metals have shown a trend of breaking and falling. To this end, we have once again invited several guests to make a comprehensive interpretation of the macro-economy and various varieties of ferrous metals. What we invited today are Zhang Qiusheng, head of Nanjing Iron and Steel Marketing Department, Cui Qin, head of Jianfa material Research Department, Qian Shiying, head of Xinmeng Investment Commodity, du Menghua, General Manager of Fuzhou Mining, and Zhu Xinxing, analyst of Dunhe Investment Ferrous Metals.

Guest 1: Zeng Ning, Deputy General Manager of CITIC Futures Research Department

First of all, as the organizer, I would like to report our overall view on the ferrous metal market on behalf of our team. Recently, there has been a sharp fall in ferrous metals as a whole, which is much weaker than the general expectations of the market at the beginning of the month. Let's first sort out the logic.

Ferrous metals have generally continued to rise since July, but contradictions among some of these varieties have actually continued to accumulate, especially thread and iron ore, whose inventory has continued to rise after July, but based on good expectations of future demand, ferrous metals as a whole rose sharply during the off-season. However, since September, the peak season originally expected by the market has not arrived, and negative signals have appeared both microscopically and macroscopically, the original expectation has become reality-dominated, and the accumulated industrial contradictions have broken out after September, which is the main factor for the recent sharp adjustment of ferrous metals as a whole.

From a macro point of view, real estate and infrastructure are weaker than expected. From the perspective of real estate, we also mentioned that real estate may be the biggest risk in the future. On August 20, after the Ministry of Housing and the people's Bank of China designated the "three red lines", the loose financing environment of real estate enterprises in the first half of the year will be tightened, thus affecting access to land and new construction. This situation has begun to be reflected. In August, there was a substantial negative growth in the area of land purchase, while the growth rate of new construction also decreased significantly. The area of land purchase decreased significantly in 2019, but the new construction maintained a relatively high growth, mainly due to the relatively high land inventory at that time, but the current land inventory has decreased significantly compared with 2018, while the broad inventory of commercial housing has increased, and the compactness of land purchase and new construction will increase significantly. After a significant decline in land transactions, it will be transmitted to new construction in the later stage, resulting in a decline in demand for real estate steel.

From the perspective of infrastructure, the growth rate of infrastructure investment declined further in August, which has a lot to do with the direction of special bonds. Since the beginning of this year, infrastructure investment has been more dependent on special bonds, but the proportion of special bonds invested in infrastructure has declined significantly in the past two months. After the relaxation of shed-to-special bonds, the proportion of special bonds invested in infrastructure fell from more than 70% in the first half of the year to about 40% in the past two months. As a result, infrastructure investment is lower than the growth rate previously estimated according to the source of funds, which reflects the continuing shortage of funds in the micro aspect.

The lack of expectations in real estate and infrastructure has led to the continuous accumulation of the inventory of building materials. after the macro expectations have been dashed, the industrial contradiction has become particularly prominent. if we want to achieve the removal rate of more than 400000 tons per week after last year's National Day, assuming that the output is maintained at about 3.7 million, even if the demand in the peak season after National Day holiday returns to more than 3.7 million, that is, the table needs more than 410, the inventory can only maintain the same rate as that in the same period last year. Then the inventory will remain at a very high level during the winter storage period, which makes the market trade the winter storage logic in advance, and steel prices fall sharply.

After the fall in steel prices, steel profits further decline, the current spot profits are basically in the break-even range, electric furnace steel continues to be in a state of loss. Under such a high inventory, in order to achieve a balance between supply and demand, under the background that the increase in demand is difficult to meet the previous expectations, the contradiction can only be stabilized through the adjustment of supply, which makes the market further trade the logic of reducing production. This has led to a sharp drop in the price of raw materials, especially high-valued iron ore.

From the perspective of the fundamentals of iron ore, the original contradiction is gradually being resolved. The total inventory of iron ore has continued to rise since July, and there has been a continuous rise in middle-grade ore depots in recent four weeks. As we said before, when the output of molten iron reaches its peak and its own inventory is accumulating, the main contradiction of iron ore turns to becoming a good material. Under the background of the reduction of production, the high valuation of iron ore makes it the most flexible variety, breaking the pattern of high shock in the early stage.

Another important factor affecting the valuation of iron ore is scrap. In the first two months, the price of hot metal continued to be higher than that of scrap. Even if the price difference between hot metal and scrap is converted according to the yield and carbon content, the price difference between hot metal and scrap is still at a very small level. Once production is reduced, the protective effect of scrap on molten iron disappears, which will lead to a simultaneous decline in demand for scrap and hot metal. From the point of view of the supply of scrap, with the improvement of the manufacturing industry and the improvement of the weather in the fourth quarter, the supply of scrap will further improve. Therefore, on the whole, with the accumulation of iron ore and the improvement of scrap supply, once the steel mill reduces production, it will be disadvantageous to the supply and demand of iron as a whole.

On the whole, whether ferrous metals can stabilize after a continuous decline requires two conditions: one is a substantial reduction in production by steel mills, and the other is a rebound in terminal demand. In terms of supply, production is expected to decline gradually with the further decline of profits, but the process of reducing production through profits is relatively slow. From the point of view of demand, Jin Jiu is expected to be dashed, but we do not think there will be a cliff decline in demand. Infrastructure investment is indeed lower than expected, on the one hand, it has a lot to do with the change in the orientation of special bonds, and on the other hand, the landing of special debt funds lags behind. Before October, there are still more than 800 billion special bonds to be issued. Although the proportion of investment in infrastructure has declined, the absolute value is still relatively high, and the growth rate of infrastructure investment may pick up in the later stage.

From the perspective of real estate, the start of real estate construction in the past few months is relatively high, and the demand for steel is still resilient in the short term. Combined with the relevant data of cement, although the real demand is lower than expected, it is not very bad, and the apparent demand may be disturbed by the imported billet factor. After October, with the weakening of the imported billet factor, the apparent demand may improve. The performance is that the supply is reduced and the storage is accelerated. Therefore, in the current steel mine base difference is relatively large, in the short term will not over-kill.

Jiabin II, Zhang Qiusheng, head of Nanjing Iron and Steel Marketing Department

1. Market review

From January to August, the price of black series showed a ladder upward, and the performance of coiling board was better than that of building materials. Compared with last year, all varieties from January to August decreased compared with the same period last year. In terms of raw materials, falling first and then rising, the performance is stronger than that of finished products, resulting in a 25% contraction in steel profits.

2. Outlook for the fourth quarter

The correction in September was not caused by a fundamental change in the fundamentals of supply and demand. There are three main logic:

1) after the strong performance of the US dollar, the second outbreak of the epidemic led to a renewed weakening of market expectations for global economic growth, putting commodities under pressure.

2) since April, the black tie has risen for four months in a row, and it is normal to have a relatively large correction at present. For the whole fourth quarter, not bearish. The September correction was a good thing, laying the foundation for further gains in the fourth quarter. This year's Spring Festival lags behind by about a month, and this year marks the end of the 13th five-year Plan. There will be a rush in the fourth quarter. The current demand is not bad, building materials to maintain a daily turnover of more than 200000 tons, we think this year's demand is higher than expected.

3) from the perspective of capital markets, there is some tightening, but we think it is a moderate tightening after a substantial release of water in the second quarter, which does not represent a shift in policy. Inventory has reached a level, including our production, production capacity has also reached a level, so high inventory is a normal, high inventory is not the core factor to suppress the rise in steel prices, but it is the main factor to suppress the increase.

On the whole, we are thinking too much about the fourth quarter.

3. Prospects for 2021

1) Price center: the price center will continue to decline in 2021, with the thread center at 3680 yuan this year, and there is expected to be a decline of about 200 yuan next year. In terms of imported mines, it is US $93.41 in 19 years and US $97.1 from January to August. The hub of this year is expected to be between US $100 and US $105, and the hub of iron ore next year is about US $100. In terms of coke, this year is the year of acceptance of coke supply-side reform. Coke will still be strong in the fourth quarter, but the price center will fall by about 100 yuan next year. From the point of view of the first-class coke in Rizhao Port, the price center this year is expected to be about 2000 yuan. As for scrap, according to normal logic, the price center will probably adjust back to 100 yuan next year. This year, the central price value is expected to be 2750 yuan, and next year it will probably drop to about 2650 yuan. However, whether the import of scrap will be liberalized next year is the most important factor affecting mineral prices and scrap prices next year.

2) Global economy: from the global macro-economic point of view, the global economy will face a major adjustment next year, there are four main risks: 1. The second outbreak of the epidemic may have a further impact on the global economy; 2. Geopolitical conflicts will intensify, and the game between China and the United States will continue; 3. The global flood brings inflationary pressure and debt risk; 4. The recovery of the global economy lacks momentum.

3) domestic economy: from the perspective of the domestic economy, next year marks the 100th anniversary of the founding of the Party, and the tone of steady economic growth will not change fundamentally. This year marks the end of the 13th five-year Plan, and the state supports the growth rate of economic growth. The dual-cycle development strategy will further expand domestic demand and effective investment. Real estate is still available next year, to suppress housing prices is not the intention of the government, but to stabilize prices and expectations, every year real estate demand for steel to form a strong support. Real estate is just divided, and house prices in core cities will rise.

The overall domestic demand is flat or slightly increased, which is mainly reflected in: 1. The growth rate of infrastructure will increase slightly; 2. Real estate maintains high toughness; 3. Construction machinery maintained high growth, exports continued to rise; 4. The overall car is not very optimistic, but at the bottom of the recovery period, next year's car consumption will be better than this year; 5. The three major indicators of shipbuilding, namely, shipbuilding completion, new orders and hand-held orders, are all at the bottom. With the recovery of global trade volume, shipbuilding demand will increase slightly, and the steel consumption of newly started high-tech and high value-added ships will increase. Therefore, we think shipbuilding will hit bottom and rebound; 6. Home appliances will not be too bad, it is still a period of growth; 7. On the export side, it has fallen by 20% this year and will recover by 10% next year. We are optimistic about steel structures, wind power, bridges and pipelines as a whole, especially steel for intercity high-speed railways and containers, which will have restorative growth next year.

Jiabin 3, Cui Qin, head of the material research department of Jianfa.

A brief review of the past market. Before that, the market was more optimistic in the off-season, but after the policy of three red lines in real estate financing, the wind direction of real estate has changed. There are several steps to the decline. The first step is the peak of the far moon in early September, especially the hot roll. The second step is to verify the thread September demand, but the demand recovery is slow, table needs and transactions are relatively general. The third step is the transition from empty profits to raw materials. After the steel profits are gone, it will cause pressure on the raw materials, and the steel and raw materials will form negative feedback.

At present, it is still in the third step, and it has not bottomed out in the short term, the spot of raw materials has not released the risk, and there is still room for decline. The basis of iron ore futures is indeed very large, but at present, we can not fully look at the basis, the absolute valuation of spot and futures is not low, and the risk of spot raw materials will not be really released until after National Day holiday. At the end of the third step, we need to see the spot drop of raw materials and repair the base difference of raw materials.

There are two core points of coke, high profit and low inventory. Now the profits of coking plants are much higher than those of steel mills, and the actual profits of coastal coking plants are 500-600, second only to iron ore.

This year, the demand for coke is very good, and the output of hot metal has repeatedly reached record highs; while the supply of coke has not been released because of the loss of production capacity at the end of last year and the beginning of this year, although the utilization rate of capacity is high, the total supply has not increased. The extent of inventory elimination this year is only second to that of 18 years, and it has continued to decline in recent weeks, so the supply and demand of coke is still very tight. The spot is tight, but the valuation of about 1950 of the disk is not low, compared with the iron ore base difference is very large, the coke base difference is not large, indicating that the market is not particularly pessimistic about coke.

How to interpret the coke market in the later period? the first point is the change of production capacity at the supply end. In the third or fourth quarter, many coking plants are drying coke, but the yield is not good enough to be counted and verified by every family. Of course, there are also supply-side disturbances, and we have to take it one step at a time. On the whole, it is believed that the supply capacity will increase steadily regardless of the changes in new and lost capacity. Because in the case of good profits, coking plants generally procrastinate as long as they can, and now there are fewer and fewer one-size-fits-all policies, and the weight of profits may be heavier. The second point is to look at the output of hot metal, if there is a reduction in hot metal production, the removal of coke will be reversed more quickly.

To sum up, combined with the changes in coke production capacity and profits, it is not reasonable for medium-and long-term coking plants to maintain high profits, and they are more willing to meet high-altitude coke profits.

2. Prospect of coking coal market:

The price of coking coal has gone down a great step this year. Last year, the coking coal market in Shanxi was the best, and the coastal market was the worst. But this year's decline began in Shanxi. The weighted operating rate of coal mines is 10 percentage points higher than that in 19 years. Shanxi's domestic coking coal is still in surplus. Inventory is also relatively high. The official card for importing coal this year is July, and the price along the coast is still a little higher, while the price in Shanxi is relatively low.

The performance of this variety of coking coal is quite special. When other varieties rose in the second quarter, coking coal was still falling, and now other varieties are falling, but coking coal basically did not fall.

In terms of supply, the domestic supply is relatively good, and imports are still limited. The customs volume of Mongolian coal is 1000 vehicles, which can meet the demand of low-sulfur main coke in Northwest and North China. Generally speaking, the supply side is still profitable, and whether the profit can be sustained or not depends on whether Mongolian coal can be increased to more than 1500 cars, and whether imported coal from Hebei can be released through customs. At present, the 5 million tons of imported coal in Hebei is under great pressure from traders. If a batch of imports is really released, the room for coking coal to rise will also be blocked, and the supply will become negative.

From the point of view of demand, the start-up of the current coking plant is relatively high, and there will be some increment if the new capacity is put into production. The demand for hot metal remains high, and the supply and demand of coking coal will change obviously. From the point of view of inventory, the inventory of coking coal is neutral, which has repaired the bad situation of high inventory in the first half of the year, and the port warehouse has fallen. Recently, the coking plant has been replenishing the stock continuously, almost to a moderate position, and there is no special shortage of coking coal for the time being.

On the whole, it is believed that the coking coal fluctuated in the fourth quarter, and we should pay attention to several drivers, such as Mongolian coal, sea coal, hot metal, as well as the overseas situation.

Q: there has been a significant increase in imported coal recently. what is the impact of the rise in imported coal on market pricing?

Jiabin6, Zhu Xinxingdun and investment ferrous metal analyst

Since the second and third quarter, we have been concerned that the adjustment capacity of thread production in previous years has failed this year. Why? I think it's two reasons.

The first reason is the split of the production cycle between the blast furnace and the raw materials. starting from the second and third quarters of this year, the overall output of hot metal is 10% higher than that of the same period last year. Depreciation leads to high profits and high prices at this end of the raw materials, while this end of the steel mill bears relatively low profits. There is still no solution to this problem in the remaining few months of this year, or even until the first half of next year. The supply of raw materials may be difficult to match the big appetite of blast furnaces in Chinese steel mills, so we can draw a relatively certain conclusion. The pressure on the material side must come from the reduction of blast furnace production or the reduction of raw material inventory reserves caused by the excessive pressure of raw materials, the raw material end will still have greater demand elasticity, and ore and coke are still the best trading targets.

The second point is that there are splits in the production capacity between steel varieties. in fact, the price difference between coiling screws has been going up in the second half of the year, which is related to the increase in production capacity and resurgence of building materials throughout the country. Now the cost curve of the thread is so flat, which also exposes and confirms this problem. The adjustment of blast furnace is slow, and the adjustment of import and export also has this lagging effect. Therefore, the production reduction efficiency of threads appears to be particularly slow from now on, a bit like the case of strip steel in the past. once there is relatively great pressure on the spot market, the first thing to adjust is the import and export of plates, and then through the conversion to adjust the output of threads, and finally is the electric furnace, so the adjustment of this point chain is actually very inefficient, and the conversion itself also has the problem of capacity bottleneck.

The production capacity of the thread rolling line can be said to be a bit excessive, and the price difference between the coil and the screw has been out of the range of minus 100-300 since 2017. so in fact, the change in production capacity and the change in the cost curve will cause the current material to fall to the blast furnace cost to test the raw materials. then it fell to the export cost and began to test the export, which did not greatly stimulate the production profit of the electric furnace. As a result, the current thread production has not been able to decline significantly in this place.

The situation this year is still a little different from that of strip steel. because of the epidemic, the adjustment level of imports and exports has been qualitatively improved this year, and the adjustment capacity is estimated to have risen to 5%. Therefore, as the export window continues to open this year, imports and exports will give a higher weight to the adjustment of supply and demand than in previous years.

The second situation which is different from previous years is the scrap steel end. The increase in cost after the conversion of medium frequency furnace to electric furnace is in fact irreversible. Once it is said that the steel side has fallen too much in a short period of time, the logic of finding cost support through electric furnace production reduction is still going.

Third, in fact, the way of cyclical decline at the raw material end is also different. In 14-15, China's real estate demand was going down, and there was a lot of off-balance-sheet production capacity on the coal side, while iron ore had the logic of cyclical decline. but this year these conditions do not have, and the demand side does not give the signal that it is going to turn negative right now.

Q: why is the split of cement and steel demand so strong? can it support your logic?

A: because the adjustment of supply and demand by imports and exports has risen to a larger order of magnitude this year, these import stocks are actually reflected in the inventory since July and August. In fact, the demand is not weak, but there has been no way to effectively eliminate the demand. Then with such a large import and export order of magnitude, I estimate that 5-7% of the apparent demand is underestimated.