As Steel Prices Fell More Significantly than Raw Materials, Steel Profits Continued to Narrow in June; SMM Expects Steel Profits to Improve Slightly in Late July

SHANGHAI, Jul 8 (SMM) - Based on the actual inventory cycle of raw materials held by steel mills, the prices of iron ore dropped, and the prices of coke and steel scrap both dropped significantly, especially the prices of coke which have fallen by more than 400 yuan/mt. According to the SMM cost model, the steel cost of steel mills in June contracted 200 yuan/mt compared with that in May, while the prices of various steel varieties fell more significantly. Therefore, on the backdrop that steel prices fell more quickly than raw materials, the profit of steel products contracted 20-60 yuan/mt in June.

SMM believes that the steel profits are unlikely to improve palpably in July partly because July is the traditional off-season for the steel industry. The high temperature and rainy weather will affect the transportation and progress of construction projects, containing the overall demand. On the other hand, although more blast furnace maintenance by steel mills will pull down raw material prices, falling raw material prices will also lead to a drop in steel costs. Coupled with the bearish impact of the Fed's interest rate hike among others, SMM believes that the decline in steel prices will be even greater in July.

Nonetheless, in late July, with the release of demand in the infrastructure industry after the projects are launched, the demand for steel may improve. At the same time, as the production reduction of major steel mills progresses, the profits of steel mills will improve slightly.