Beware of fading macro sentiment, steel prices fall back from highs [SMM Steel Industry Chain Weekly Report]

Forecast for Next Week: Beware of Fading Macro Sentiment, Steel Prices Expected to Pull Back from Highs

This week, the ferrous metals series held up well. This week was a week for domestic and overseas macro data releases. Early in the week, China announced supply and demand data, with the supply side showing strength and industrial production growth at 5.8%. On the demand side, stimulated by "trade-in policies" and the 618 shopping festival, demand growth rebounded, but real estate and investment growth pulled back. Towards the end of the week, the US Federal Funds target rate remained at 4.25-4.5%, in line with expectations. Overall, domestic and overseas macro data largely met expectations, with market sentiment more influenced by the rally in commodity prices driven by the "Israel-Iran conflict." In the spot market, futures rose this week, improving market sentiment and leading to some release in end-user purchases. However, overall purchasing sentiment remained cautious.

In the short term, according to SMM survey tracking, current steel mill production profits are relatively attractive. Pig iron production is expected to rebound MoM next week, with cost support remaining stable. For steel, the onset of high temperatures and rainy weather in both the north and south has begun to show seasonal demand characteristics, while the supply pressure for sheets & plates remains relatively high. Overall, the futures market rally driven by sentiment this week was significant. As sentiment gradually fades, combined with the further emergence of supply-demand imbalance during the off-season, inventory accumulation pressure will increase. Therefore, it is expected that steel prices may face risks of pulling back from highs next week.

Iron Ore: Tug-of-War Between Longs and Shorts Leaves Iron Ore Stuck, Expected to Fluctuate Rangebound Next Week

Looking ahead to next week, overseas shipments are expected to rebound, but the escalation of geopolitical conflicts in the Middle East may further push up shipping costs and inhibit Iran's ore exports, providing support for ore prices. In terms of supply, the push for target at quarter-end will drive a rebound in shipments, but rainy weather may affect port unloading efficiency, limiting the increase in port arrivals and making it difficult for port inventory to accumulate significantly. On the demand side, the early resumption of production at some steel mills' blast furnaces has driven a slight rebound in pig iron production. Coupled with the expected coke price cut and improved steel mill profits, short-term restocking demand is expected to continue. However, the off-season characteristics are evident at the end-user level, with the apparent consumption of the five major steel products pulling back from highs. Under high finished steel production, the market's expectation of negative feedback still exists, which will limit the upside room for ore prices. Overall, iron ore prices are expected to struggle to break through on either side and maintain sideways movement.

Coke: Some Steel Mills Have Already Initiated the Fourth Round of Coke Price Cuts, Coke Market Expected to Be in the Doldrums Next Week

In terms of supply, affected by environmental protection factors, coking plant operations have declined, but downstream purchase willingness remains low, and coke inventory at most coking plants is still accumulating. On the demand side, steel mills' coke inventory is generally at a medium-to-high level, and the market is in the traditional off-season, with steel mills' purchasing enthusiasm remaining weak. On the raw material fundamentals, coal mines have been prioritizing safe production recently due to the impact of environmental protection and safety inspections, leading to a slight decline in output. However, the market trading atmosphere remains sluggish, with downstream coking and steel enterprises maintaining cautious procurement. As a result, coal mine shipments are not smooth, and coking coal inventory continues to accumulate. The coking coal market may remain in the doldrums next week, with expectations of further price reductions for some blended coal varieties. In summary, the overall supply-demand pattern for coke is loose, with unstable cost support. Some steel mills in Hebei and Tianjin have already initiated the fourth round of price reductions for coke, and the coke market may operate in the doldrums next week.

Rebar: Supply-demand imbalance gradually emerges, spot prices under pressure

This week, rebar prices have been consolidating, with the current nationwide average price at 3,089 yuan/mt, up 2 yuan/mt WoW. On the supply side, profits of blast furnace steel mills continue to hover around 100 yuan/mt. After the resumption of production by steel mills that underwent temporary maintenance earlier, other steel mills have largely maintained their previous production levels. EAF steel mills continue to incur losses, and the collection of steel scrap remains difficult over the long term. This week, additional manufacturers have halted operations, leading to a further decline in the operating rate. On the demand side, intermittent rainfall in eastern and northern China has affected the release of demand, with overall shipment rates being average. Trading performance remains largely similar to that of last week. However, in southern China, affected by typhoon weather, some areas have experienced flooding, making it difficult for short-term demand for construction materials to improve. In terms of inventory, weekly production has increased slightly, and the destocking rates of in-plant and social inventory have both slowed down. However, considering that steel mill profits remain unchanged, no significant production cuts have been observed for the time being. There is still a possibility of inventory buildup at steel mills next week. Looking ahead, with the initiation of the fourth round of price reductions for coke, the raw material side continues to make concessions. Driven by profits, blast furnace steel mills have not significantly reduced production volumes for the time being. With the seasonal decline in demand during the off-season, the supply-demand imbalance gradually accumulates, limiting the upside potential of spot prices. Currently, merchants are generally operating with light inventories, and inventory pressure is not significant, providing some support to the floor price. It is expected that the spot price of construction steel will continue to fluctuate rangebound next week, and the RB2510 contract will exhibit sideways movement within the 2,880-3,030 range.

HRC: Increased supply coupled with seasonal demand weakness, HRC prices expected to fluctuate rangebound next week

This week, HRC prices have fluctuated within a weak range, with the overall market trading atmosphere being average and weekly trading volumes remaining weak. On the news front, China released its May economic data, the 2025 Lujiazui Forum commenced, and the European Central Bank published its economic bulletin, among other macroeconomic information. Meanwhile, influenced by the Israel-Iran conflict, HRC prices were driven up to some extent. However, from a fundamental perspective, the impact of maintenance on hot-rolled coil production this week was 67,600 mt, a decrease of 66,200 mt WoW. Next week, the impact of maintenance on hot-rolled coil production is expected to be 19,600 mt, a decrease of 48,000 mt from this week. The short-term supply of HRC continues to increase, and pressure remains. Demand side, although order intake in manufacturing sectors such as automotive and home appliances has declined, the overall performance remains resilient. However, the impact of weather factors such as high temperatures and rainfall on the infrastructure sector is more pronounced. Despite an overall improvement in apparent demand this week, considering the continued weakening of seasonal demand in the future, it is expected that coil prices will remain under pressure. Current inventory performance aligns with previous forecasts, with social inventory continuing the destocking trend and the rate of decline expanding. By region, except for minor inventory buildups in central and north-east China, inventories in east, south, and north China are all decreasing. Steel mills have also accelerated their shipping pace, with in-plant inventory shifting from an increase to a decrease. Currently, the total inventory of SMM's large sample is 403.98, down 121,400 mt MoM, which is moderate compared to the same period last year. Cost side, expectations for the fourth round of coke price cuts have strengthened, while iron ore prices are running relatively stable, resulting in a weaker cost support than before. In summary, in the short term, the weak demand for steel in the off-season is unlikely to change. Under the pattern of strong supply and weak demand, it is expected that coil prices will continue to be under pressure next week. The most-traded HRC futures contract will remain in the doldrums within the 3000-3140 range, and the expectation for HRC prices to be in the doldrums remains unchanged.

Steel scrap: Weak supply and demand in the market, spot prices more likely to fall than rise

Supply side, this week, most regions have been affected by high temperatures and heavy rainfall, leading to a decrease in resource output and a decline in steel scrap supply. Demand side, currently, blast furnace steel mills have moderate profits, but due to the off-season, their willingness to increase production is not strong. EAF steel mills have poor profits, with three new electric furnace plants halting production for maintenance and two electric furnace plants shortening their operating hours this week. According to the SMM survey, the operating rate of electric furnace steel mills nationwide this week was 30.98%, down 3.66% from the previous period MoM, with a decrease in daily steel scrap consumption. Overall, the current steel scrap market is characterized by weak supply and demand, with spot prices more likely to fall than rise. Subsequent attention should be paid to any abnormal movements in the macro direction.

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