Sentiment trading cools down; short-term opportunities focus on environmental protection-driven production restrictions [SMM Steel Industry Chain Weekly Report]

Forecast for Next Week: Sentiment-Driven Trading Cools Down, Short-Term Opportunities Lie in Environmental Protection-Driven Production Restrictions

This week, the ferrous metals series first rose then fell, with some varieties hitting six-month highs before experiencing significant declines. On the news front, Tuesday saw market sentiment peak as expectations for the upcoming Politburo meeting combined with potential production cut expectations ahead of the September military parade, driving stronger gains in finished products than raw materials. Later in the week, the Politburo meeting concluded without exceeding expectations in its statements on real estate and anti-"rat race" competition, prompting increased exits by bulls. Fundamentally, the third and fourth rounds of coke price increases materialized this week, while finished product inventories began to accumulate. In the spot market, trading activity declined recently, with arbitrage demand still entering early in the week but transactions plummeting later. Short-term, according to SMM survey tracking, hot metal production fell by 1,000 mt WoW, remaining elevated for now. However, as the parade approaches, environmental protection-driven production restrictions may lead to lower-than-expected hot metal output, slightly weakening cost support. On the steel side, high supply coupled with weak end-user purchases resulted in inventory buildup for the five major steel products. Overall, the July Politburo meeting concluded without surprise policies, leading to bull exits. While strong expectations were somewhat disappointed, considering potential maintenance plans at steel mills in north China ahead of the September parade, the ferrous metals series may find upward momentum after the current pullback before mid-August, with SMM maintenance and production schedule data warranting close attention.

Iron Ore: Insufficient Upside Drivers for Ore Prices, Likely to Remain in the Doldrums Next Week

Imported iron ore prices edged down this week. Due to reduced prior shipments, port arrivals dropped significantly last week, with port inventories declining slightly and supply pressure remaining relatively small. Demand side, though hot metal production dipped slightly, daily average output stayed above 2.42 million mt, demonstrating resilient iron ore demand. Fundamentals continue to support ore prices. However, the Politburo meeting's generally positive but below-expectations outcome, coupled with cooling anti-"rat race" speculation, weakened overall market optimism, causing ore prices to pull back from highs. Supported by strong demand, spot ore showed greater resilience, declining less than futures. At ports, the weekly average price of PB fines in Shandong fell by 15 yuan/mt WoW.

Next week, iron ore fundamentals should remain supportive. However, environmental protection-driven production restriction expectations linked to the August military parade may unsettle market sentiment, while macro policy digestion intensifies wait-and-see attitudes. With limited upside drivers, ore prices are expected to maintain a fluctuating trend, though spot prices will likely outperform futures in terms of downside resistance.

Coke: Fifth Round Increase Postponed, Market May Hold Generally Stable with Slight Rise Short-Term

On the news front, steel mills temporarily rejected the fifth round of price increases this week, planning to reassess based on market conditions next week. Supply side, coke producers' profitability improved, but with high coking costs, most maintained previous operations without clear production hike intentions. Meanwhile, coke plant shipments remained smooth with low in-plant inventories. Demand side, steel mills maintained decent profits and moderate production levels. Recent heavy rains disrupted transportation in some regions, hindering mill arrivals and boosting procurement enthusiasm. Raw material fundamentals, coking coal supply recovered slowly due to safety inspections and environmental factors. However, market sentiment cooled recently, with downstream buyers showing reduced interest in high-priced coal grades. Online auction prices showed mixed performance. Short-term coking coal prices are expected to stabilize overall, with some non-increased grades potentially catching up. In summary, coke fundamentals remain tight with cost support intact, suggesting the coke market may hold up well in the near term.

Rebar: Strong Sentiment Gives Way to Weak Reality as Spot Prices Face Downward Pressure

Rebar prices fluctuated downward this week, with the nationwide average at 3,282.3 yuan/mt, down 62.5 yuan/mt WoW. Supply side, blast furnace steel mills maintained moderate profitability and steady production levels. Some mills previously switched to higher-margin products, with no immediate hot metal flow back to construction materials. EAF steel mills saw improved profits early week, with extended operating hours at some facilities, though most still maintained off-peak power hour production. Later week, spot price pullbacks eroded immediate profitability, limiting near-term operating rate upside. Demand side, typhoon disruptions halted procurement in coastal regions, while sharp price declines dampened trading activity elsewhere. Overall demand remained weak, with off-season characteristics persisting. Inventory side, earlier sentiment-driven agent pickups accelerated stock transfers from mills to social inventories. This week saw mill inventory declines offset by social stock builds, resulting in slight cumulative growth. Limited off-season demand may gradually highlight inventory pressure. Overall, the market transitioned from strong sentiment to weak reality, with building material fundamentals showing accumulating contradictions. Next week's construction steel spot prices may remain in the doldrums, subject to potential production restrictions and work suspensions around the September parade in North China. Sentiment-driven rebounds cannot be ruled out.

HRC: Macro Expectations Fall Short as Sentiment Pulls Back, Likely to Remain in the Doldrums Next Week

Mainstream spot market prices fell 50-110 yuan/mt WoW from last Friday. Later week, trading confidence weakened noticeably with futures market movements, resulting in moderately poor daily transaction atmosphere. Frequent market news emerged this week. Domestically, the Politburo meeting yielded no additional surprise policies, triggering significant sentiment pullbacks. Thursday evening brought market reactions to coke plant overproduction restrictions. Reviewing this week, the supply and demand performance of HRC was relatively stable. While underlying contradictions were accumulating, they were not yet acute. Overall inventory aligned with the seasonal inventory buildup cycle but remained at a relatively low level compared to the same period last year. Currently, SMM statistics show that the social inventory of HRC in 86 warehouses (large sample) nationwide is 3.192 million mt, up 55,100 mt MoM, representing a 1.76% MoM increase, and down 32.02% YoY. Looking ahead, there are still rumors of production restrictions in the market, and iron ore demand is expected to weaken, which will put pressure on ore prices. However, steel mills' overall profit levels remain relatively good in the short term, and there are expectations for coke price increases. Cost support remains relatively resilient and is not easily eroded in the short term. Moving forward, as we enter August, macro factors are relatively neutral. The focus of HRC will return to fundamentals. After sentiment pulls back, the wait-and-see attitude among end-users will re-emerge. It is expected that HRC prices will be in the doldrums next week, with the most-traded contract's fluctuation range given as 3320-3470.

Steel Scrap: Weak Supply and Demand Dynamics, Next Week's Steel Scrap Market May Fluctuate Rangebound

On the supply side, under hot and rainy weather conditions, it is difficult to significantly increase the amount of waste generated from industrial activities, and the overall supply of resources is relatively tight. On the demand side, according to the SMM survey, the operating rate of EAF steel mills this week was 37.82%, up 2.08% from the previous period. The demand for steel scrap has slightly increased. However, due to the weakness of ferrous metals series futures this week and the decline in steel prices, it is difficult to fundamentally improve end-use demand, which poses significant pressure on the sustained growth of steel scrap demand. Overall, the contraction of the supply side provides some support for prices to a certain extent, but the uncertainty on the demand side makes steel scrap prices lack sustained upward momentum. It is expected that the steel scrap market will continue to fluctuate rangebound next week. Subsequent attention should be paid to the destocking rhythm of finished steel products and changes in steel mill profits.

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