Contradictions gradually accumulated; it is recommended to short the market during the rebound [SMM Weekly Report on Steel Industry Chain]

Forecast for Next Week: Contradictions Gradually Accumulate; Recommend Shorting on Rebounds

This week, the ferrous metals series experienced increased volatility, opening with a decline and slightly recovering losses towards the weekend, yet the overall weekly downtrend was significant. On the macro front, as the weekend approached, the US Court of International Trade blocked the Trump administration's reciprocal tariffs and fentanyl tariffs. However, by Friday, news emerged that the court's ruling had been temporarily suspended. In reality, even if the ruling were implemented, tariffs on specific industries such as automobiles and their parts, steel, and aluminum would not cease, and the actual impact on steel would be limited, so it is inadvisable to be overly optimistic. In the spot market, the futures market remained weak throughout the week, with extremely poor market trading sentiment. Demand was only partially released towards the weekend. In the short term, according to SMM survey and tracking, pig iron production is expected to continue fluctuating at highs in the short term. However, steel mill profits are under pressure, and there is a risk of increased temporary inspections in the future. Coupled with increased overseas shipments, there is suspicion of a loosening in cost support. For steel, with the arrival of the rainy season in south China, the demand for construction materials is in the transition phase between the "off-season and peak season." Although the short-term resilience of manufacturing demand still exists, uncertainty in demand increases as June approaches. Overall, contradictions in the steel fundamentals have not yet become prominent. However, with the arrival of the off-season and a reduction in working days next week, contradictions will gradually accumulate. In the short term, steel prices may remain in the doldrums. It is recommended to short on rebounds, with a focus on the progress of overseas tariffs.

Iron Ore: Fundamentals Continue to Weaken; Iron Ore Prices Remain in the Doldrums

This week, imported iron ore prices fell sharply, mainly due to the dual impact of the implementation of crude steel production reduction policies and weakening fundamentals. Shandong, Anhui, Fujian, and other regions have clarified their crude steel production control targets, with some steel mills planning to reduce their annual output by 5%-10%, directly suppressing expectations for iron ore demand. Although the potential easing of US tariff policies may bring a temporary boost, the industry has entered the traditional off-season, with insufficient rebound momentum. In the spot market, the weekly average price of PB fines at Shandong ports fell by 26 yuan/mt WoW. Looking ahead to next week, the fundamental support for iron ore itself is expected to continue weakening. Although the crude steel production reduction policy will still disrupt the market, its impact on sentiment may gradually dull. Overall, SMM expects iron ore prices to remain in the doldrums next week, with limited upside and downside potential and narrowed volatility.

Coke: Bearish Sentiment Remains Strong in the Market; Third Round of Price Cuts Expected for Coke Next Week

In terms of supply, the profit and loss situation of most coking enterprises remains within an acceptable range, with production temporarily stable and coke supply fluctuating at highs. In terms of demand, there has been a seasonal decline in steel demand, with pig iron production continuing to decline. Moreover, with the arrival of the rainy season in south China, high temperatures and rainy weather have affected project commencements, further dragging down steel mills' enthusiasm for purchasing. Regarding the fundamental situation of raw materials, coal mines have maintained a normal production pace, and the supply situation remains loose. Downstream buyers remain cautious, with poor online auction results. Coal mines have lowered their starting auction prices, but the signing situation is still not good. In summary, the market's bearish sentiment remains strong, and the coke market is expected to remain in the doldrums in the short term, with a third round of price cuts expected for coke next week.

Rebar: Transition Between "Off-Season" and "Peak Season" for Demand; Weak Industry Realities Fail to Drive Up Spot Prices

This week, rebar prices have trended downward weakly, with the current nationwide average price at 3,104 yuan/mt, down 60 yuan/mt WoW. On the supply side, individual steel mills in North and Northwest China are no longer generating positive cash flow and have arranged blast furnace outages this week, affecting some construction material production. Blast furnace mills in other regions are still profitable in production, with no maintenance plans scheduled for the first half of June. Some electric furnace mills in Central China have resumed production recently, with a slight increase in operating rates. However, electric furnace mills are currently in a state of overall losses, with some manufacturers expecting to reduce operating hours, potentially leading to further production declines in the future. On the demand side, market sentiment was pessimistic at the beginning of the week due to market conditions, with poor trading performance. However, downstream buyers' stockpiling demand before the Dragon Boat Festival was released on Wednesday and Thursday. Construction progress slowed down in downstream markets during the plum rain season in June, and construction site operations were restricted during the college entrance examination period, leading to an overall weakening of demand expectations. However, there is still the possibility of sporadic demand surges. In terms of inventory, the current contradiction between supply and demand fundamentals is not prominent, and inventory continues to destock. However, steel mills have not taken significant actions to control or reduce production. Combined with the falling price trend, agents' enthusiasm for picking up goods is low, and there is a slight possibility of an increase in in-plant inventory after the holiday. Looking ahead, with increasing uncertainties overseas and in the absence of strong stimulus policies domestically, the steel market is expected to gradually enter the off-season in June. Weak industry realities will fail to drive up spot prices in a trending manner, and the market is expected to remain in the doldrums with weak oscillations in the short term. However, there is still the possibility of sporadic rebounds driven by domestic policy efforts. It is expected that the RB2510 contract will trade within the 2,850-3,100 range next week.

HRC: Cost Support Continues to Weaken; HRC Prices Still Have Room to Fall Next Week

This week, HRC prices have weakened significantly, with a cold market trading atmosphere and a continued downward trend in overall trading volume from last week. In terms of supply, HRC production has rebounded somewhat this week but remains at a low level YoY. On the demand side, there has been a seasonal decline in steel demand, coupled with a significant weakening in the futures market. Downstream end-users lack confidence and willingness to purchase, with no significant increase in demand. In terms of inventory, according to SMM statistics, social inventory nationwide continued to decline this week, but the rate of decline has narrowed significantly. By region, there has been inventory buildup in the South China and Northeast China markets, while the East China, Central China, and North China markets have continued the destocking trend. On the cost side, pig iron production has peaked and pulled back, with the shadow of the crude steel production reduction policy looming. Prices of coke and iron ore have both declined, weakening cost support. Looking ahead, the impact from HRC maintenance will decrease, and supply will increase slightly. The production pace of downstream manufacturing industries will slow down, and demand will gradually weaken. The fundamental contradictions in the HRC market will begin to accumulate. Moreover, there are expectations of further price declines for coke and iron ore, which will continue to weaken cost support. Next week, the most-traded HRC futures contract may operate in the doldrums within the 3000-3130 range, and there is still room for HRC prices to decline further.

Steel Scrap: Rebar Futures Break Below 3000, Steel Scrap Prices May Operate in the Doldrums

On the supply side, torrential rain has swept across South China and Southwest China this week, affecting the recycling and transportation of steel scrap in these regions and impeding the flow of goods. On the demand side, rebar futures are in the doldrums, and finished steel prices have fallen, further compressing the profits of steel enterprises. Some EAF steel mills have once again fallen into losses, and market sentiment is bearish, weakening support for steel scrap. Overall, losses at EAF steel mills have widened, and it is difficult for steel scrap demand to increase. Blast furnace steel mills, due to relatively low pig iron costs, have reduced the proportion of steel scrap added in converters. Therefore, it is expected that steel scrap demand will remain weak next week, and prices may oscillate in the doldrums.

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