Supply-demand imbalance begins to accumulate; it is still recommended to focus on shorting at highs [SMM Weekly Report on Steel Industry Chain]

Forecast for next week: Supply-demand imbalance begins to accumulate; still recommended to focus on short positions when prices are high

This week, the ferrous metals series first rose and then fell, with an overall downward trend. At the beginning of the week, optimistic signals from the China-US talks improved market sentiment, driving the futures market up. However, by mid-week, the fundamental weakness in steel, coupled with fading sentiment, led to a decline in the futures market. As the weekend approached, the US announced that it would impose a tariff hike on steel home appliances starting from the 23rd, causing a significant drop in other futures markets except for coking coal and coke. In the spot market, the futures market rose in the first half of the week, leading to a temporary improvement in market transactions, but most purchases were driven by immediate needs and low prices, with seasonal characteristics beginning to emerge.

In the short term, according to SMM survey tracking, pig iron production continued to decline MoM this week, with further room for a slight decline in the future, potentially loosening cost support. For steel, with the arrival of high temperatures and rainy weather in the north and south, there are expectations of seasonal weakness in demand for construction materials and manufacturing, while the supply pressure for sheets & plates remains relatively high. Steel exports in May remained at a relatively high level, but there may be room for a decline in June. Overall, the seasonal weakness in demand is evident, with supply at a relatively high level, further accumulating the supply-demand imbalance. Therefore, it is expected that steel prices may remain in the doldrums next week, with unchanged short position operations during rebounds. The emergence of a bottom will focus on SMM steel port departures data and inventory accumulation.

Iron ore: Off-season effects become prominent; prices are expected to continue fluctuating rangebound in a weak manner next week

This week, optimistic expectations from the China-US talks once boosted market sentiment, but as news flow dried up, market sentiment weakened somewhat. Overall, macro factors have had a relatively significant short-term impact on the iron ore market. In terms of fundamentals, the domestic iron ore market's supply and demand situation remains relatively stable. Regarding imported ore, the total global iron ore shipments by SMM increased MoM last week, and the total iron ore arrivals in China also increased, indicating growth in supply. However, the daily average pig iron production declined slightly, leading to a slight accumulation of port inventory. Nevertheless, the supply-demand imbalance in iron ore is relatively small.

It is expected that iron ore prices will continue to fluctuate rangebound next week. Overall, despite the support from high pig iron production for ore prices, the entry into the plum rain season in south China, seasonal weakness in steel demand, and expectations of the crude steel production control policy will limit the upside room for ore prices. In the short term, the market will continue to focus on the results of the China-US talks and the apparent demand and inventory data of the five major steel products.

Coke: Steel mills' desire to bargain down prices intensifies; expectations for a fourth round of price cuts in the market next week

In terms of supply, the national environmental protection checks team has been stationed in provinces such as Shanxi and Inner Mongolia, with stricter environmental protection checks. Some coking enterprises have implemented phased production cuts, and some have reduced production slightly due to losses and inventory accumulation, leading to a tightening of coke supply. On the demand side, the off-season in the market has led to a decrease in demand for finished steel products. Additionally, steel mills' coke inventories are at a moderately high level, lacking restocking demand. Some steel mills with high coke inventories are even controlling arrivals. In terms of news, the US Department of Commerce announced that it would impose a tariff hike on various steel household appliances starting from June 23, including "steel derivatives" such as dishwashers, washing machines, and refrigerators. Regarding the raw material fundamentals, some coal mines have halted production due to accidents, leading to a tightening of coking coal supply. However, the market sentiment remains strongly bearish, with downstream buyers cautiously purchasing. Online auction transaction prices have mainly declined. Coal mines' shipment situation has not improved, and they face significant inventory pressure. Next week, coke prices may continue to be under pressure. In summary, there is an expectation for a fourth round of price reduction for coke next week.

Rebar: Seasonal Demand Off-Season, Industry Contradictions Gradually Emerging

This week, rebar prices fluctuated rangebound. The current nationwide average price is 3,087 yuan/mt, down 10 yuan/mt MoM. On the supply side, blast furnace steel mills are still in a profitable stage. In June, some steel mills have adjusted their production structures, shifting to increase the production of high-quality special steel and strip steel, with expectations for further reductions in construction materials. Steel scrap prices have remained relatively firm, exacerbating production losses at EAF steel mills. This week, individual steel mills have halted operations, and several others have reduced their operating hours. The operating rate is significantly lower than the same period last year, with short-term plans for further production cuts or shutdowns at some mills. On the demand side, the plum rain season has arrived in south China, making it difficult for some downstream construction projects to operate. Overall transaction performance has contracted compared to last week. The plum rain season is expected to last until the end of June. Influenced by high temperatures in north China, the traditional off-season demand slump is unlikely to change. In terms of inventory, the production decline rate has widened this week, with in-plant and social inventories continuing to decrease. Apparent demand is in a seasonal decline phase. In the short term, the number of newly halted or reduced production steel mills has decreased, and the production decline rate may narrow. There is a risk of in-plant inventory accumulation. Looking ahead, during the domestic macro vacuum period, coupled with the impact of overseas macro uncertainties, it is difficult for news to significantly drive an improvement in market sentiment. The supply and demand fundamentals can temporarily maintain a weak balance. However, as the market officially enters the demand off-season, contradictions in the industry chain will gradually become prominent. Overall, spot prices are under upward pressure. Among them, agents' spot inventory pressure is relatively small, and they are basically selling at a loss, slightly limiting the speed at which bottom prices decline. It is expected that the RB2510 contract will fluctuate rangebound within the 2,850-3,030 range next week.

HRC: Seasonal Demand Weakening, Expectation of Weak Price Fluctuations Remains Unchanged

This week, HRC prices initially rose and then fell, fluctuating rangebound within a certain range. The market trading atmosphere has improved somewhat, with weekly transactions being moderate. In terms of supply, the impact from maintenance on hot rolling has decreased this week, leading to an increase in HRC supply. On the demand side, key automakers issued statements committing to "payment terms not exceeding 60 days," thereby reducing the risk of extended payment periods in the automotive industry. This has accelerated trade collections and increased the willingness to purchase, leading to an increase in apparent demand. In terms of inventory, SMM's survey this week showed that the social inventory of HRC across 86 warehouses nationwide stood at 3.0577 million mt, down 12,300 mt WoW, or 0.4% WoW, indicating a slight decline in social inventory nationwide. On the cost side, coke prices remained stable this week, while iron ore prices adjusted slightly downward, resulting in unstable cost support. Looking ahead, the impact of maintenance on HRC production is expected to decrease further, with supply showing an upward trend. However, the arrival of high temperatures and rainy weather is expected to seasonally weaken demand. Additionally, with coke prices expected to fall, cost support is expected to continue to decline. Next week, the most-traded HRC futures contract may remain in the doldrums within the 3,000-3,120 range, and the expectation for HRC prices to remain in the doldrums remains unchanged.

Steel Scrap: Weak Supply and Demand; Prices May Fluctuate Rangebound with a Slightly Bullish Bias Next Week

On the supply side, as south China enters the rainy season and north China is in the wheat harvest period, steel scrap output has been affected to some extent, with limited scrap resources available in the market. Coupled with the current downturn in the real estate industry, the output of construction site scrap has decreased, further impacting the overall supply of steel scrap. On the demand side, profits at EAF steel mills continue to deteriorate, with the operating rate of electric furnaces declining. According to the SMM survey, the national electric furnace operating rate this week was 34.64%, down 3.78% WoW. This week, two additional electric furnace mills halted production for maintenance, and eight electric furnace mills shortened their operating hours, leading to a decrease in steel scrap demand. Overall, the steel scrap market this week has been influenced by seasonal and profit factors, resulting in a weak supply and demand situation. It is expected that steel scrap prices will fluctuate rangebound next week.

1. For data referenced in this report, please visit the SMM database (https://data-pro.smm.cn/)

2. For more information on SMM's steel news, analysis reports, databases, etc., please contact Li Ping of the SMM Steel Department at 021-51595782

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