SHANGHAI, Jun 24 (SMM) - Recently, stimulated by frequent interest rate hikes by the Federal Reserve and many European countries, market concerns about the economic prospect continued to ferment. The ferrous products market was the most affected, with the full range of varieties continuing to dip. Among them, the most-traded rebar contract fell to a low of 4,074 yuan/mt recorded in December last year.

The spot market was also not optimistic. The prices of HRC, for example, stood at 4,274.2 yuan/mt on average as of June 22, down almost 1,000 yuan/mt compared with the year-to-date high on April 2 and a fall of 500 yuan/mt even compared with the previous low on May 26, according to SMM statistics. The spot prices were generally low even on a year-on-year basis.

The slump recently is a result of the complex of bears on the macro and industrial front in China and abroad

The recent round of slump is the combined result of the complex of bears, including the frequent interest rate hikes by the Federal Reserve and many European countries, extreme weather conditions in China including high temperature and heavy rains, the kick-off of the seasonal low, as well as the slower-than-expected recovery of steel demand after COVID lockdown was lifted in major cities in China.

In terms of the fundamentals, expected extensive production cuts of steel mills failed to arrive as expected, resulting in constantly high supply and inventory. And the demand has also been low due to the of-season. Coupled with the ferment of market panics last week, steel prices dropped steeply.

Production cuts can be expected amid expanding losses?

The overall blast furnace operating rates dropped quickly this week on the backdrop that the production losses have expanded to 400-800 yuan/mt, according to SMM understanding. On the combination of sales difficulties caused by market panics, the profitability of steel mills further deteriorated, with aggravating intensions of reducing the production.

As of June 23, a total of 31 blast furnaces newly started to overhaul due to losses, reducing the daily pig iron output by 101,750 mt, most of which are located in north China. In addition, a few steel mills were flooded due to the recent heavy rains and had to be shut down.

Steel price outlook

Looking ahead, more steel mills are expected to join the queue of reducing the production, hence iron ore and coke prices will keep falling in the near term. On the other hand, finished products prices will usher in a round of correction after a deep dive, and the profits of steel mills will repair to some extent. However, as the terminal demand remains sluggish, the profitability will still be contained.

In terms of the price outlook, as palpable supply reductions can be expected, the fundamentals of steel will improve marginally. However, the terminal front lacks strong growth engine after the market enters the off-season, which is unable to lead a strong rally of steel prices. It is expected that short-term steel prices will fall along with the contracting cost. In addition, as most of the steel production reduction is found in construction steel, the prices of construction steel will probably outperform that of HRC.