The time window for production restrictions shortens, upside room for futures prices limited [SMM Weekly Report on Steel Industry Chain]

Forecast for Next Week: Production Restriction Time Window Shortened, Limited Upside Room for Futures Prices

This week, the ferrous metals series continued its trend of rising first and then falling. In the first half of the week, news of safety inspections and production reductions/restrictions for coking coal and coke led to a strong rally in coking coal and coke, driving a rebound in the ferrous metals series from lows. In the second half of the week, expectations that new coal mine safety regulations would lead to the closure of small and medium-sized coal mines did not materialize. Coupled with an increase in transaction fees and the DCE's expected move to cool down coking coal prices, the follow-up market rally ended, and futures prices experienced a deep correction. In the spot market, transactions were moderate in the first half of the week, but mostly driven by speculative demand for calendar spreads, with terminal demand remaining in the off-season. In the short term, according to SMM surveys, hot metal production fell by 4,300 mt WoW this week. The current military parade has not yet had a substantial impact on blast furnaces, and hot metal production remains at a relatively high level. However, the seventh round of coke price increases may face resistance, and short-term cost support may remain stable. For steel, current profits are high, and steel mills' production enthusiasm is extremely strong. With no impact from production restrictions yet, the loose supply situation in finished steel products is difficult to change. Terminal procurement has not yet shown improvement, and the five major steel products will continue to experience inventory buildup. In summary, although SMM's conclusion on the impact of environmental protection-driven production restrictions in north China is below expectations, rumors and disturbances still exist before a final conclusion is reached. Futures prices still have the potential to continue rising under emotional stimulus, but considering the shortened time window, upside room will be further limited, and the magnitude of corrections after rallies will continue to increase.

Iron Ore: Prices May Continue to Fluctuate at Highs Amid Production Restriction Expectations

Looking ahead to next week, the iron ore market is expected to maintain a pattern of fluctuating at highs. In terms of supply, overseas shipments are expected to recover slightly, with the overall supply side remaining relatively stable. The demand side presents a mixed picture. On the one hand, the resumption of production at blast furnaces that underwent maintenance earlier will drive an increase in hot metal production. On the other hand, in north China, affected by environmental protection-driven production restriction policies, some steel mills have initiated annual maintenance plans in advance, which may constrain the increase in hot metal production. It is worth noting that although the market's sensitivity to news of production restrictions in north China has decreased, as the implementation time approaches, relevant policy developments will still periodically disturb market sentiment. In summary, against the backdrop of a relatively balanced supply-demand fundamental, an overall positive macro environment, and uncertainties in policy expectations, it is expected that iron ore prices will continue to fluctuate at highs next week. Close attention should be paid to changes in the actual production rhythm of steel mills and the latest policy developments.

Coke: Tight Supply Pattern Difficult to Change Rapidly, Short-Term Prices May Remain Stable

Mainstream steel mills have accepted the sixth round of coke price increases, with an increase of 50-55 yuan/mt or 70-75 yuan/mt, effective from midnight on August 14th. In terms of supply, coking enterprises' profits have improved, and coke supply has been slightly released. However, affected by factors such as environmental protection and the military parade, some coking enterprises have received production restriction notices, and there are expectations of a tightening in coke supply. In terms of demand, blast furnace operations at steel mills remain at a high level, with high daily coke consumption. Additionally, some steel mills have low coke inventories and good procurement willingness. In terms of raw material fundamentals, due to strict investigations into overproduction and other reasons, coking coal supply has tightened. However, recently, wait-and-see sentiment has re-emerged downstream, with procurement rhythms slowing down. Online auctions have shown mixed performance in price changes, with some downstream enterprises cautiously signing orders. In the short term, coking coal prices are in the doldrums. In summary, the tight supply pattern of coke is difficult to change. Even if the sixth round of coke price increases are implemented and cost support weakens somewhat, coke prices can still remain stable in the short term.

Rebar: Fundamental Contradictions Have Emerged, but Producers Have Strong Reluctance to Budge on Prices

This week, rebar prices rose first and then fell. The current nationwide average price is 3,250.2 yuan/mt, down 19.9 yuan/mt MoM. On the supply side, profit margins for BF and EAF steel mills have narrowed recently. However, the gross profit margins for producing construction materials at most blast furnace mills continue to be in the range of 100-200 yuan/mt. Some steel mills have adjusted their production structures, prioritizing the production of plate and strip. Recently, the profitability of producing two-end specifications at some electric furnace mills has shifted from profitability to break-even, with middle specifications continuing to incur losses. Some steel mills have reduced their operating hours, leading to a slight decrease in supply-side pressure. On the demand side, with the market rallying at the beginning of the week, speculative procurement demand was released. However, due to frequent high temperatures and rainy weather during the summer, project construction progress has been affected, with actual downstream procurement mainly driven by rigid demand, and demand performance has been average. It is understood that around the major military parade in September, the number of construction sites in the Beijing-Tianjin-Hebei region that have received work stoppage notices is limited, and the market indicates that the substantive impact on demand may be limited. In summary, currently, the profit margin for steel mills on a point-to-point basis has narrowed, and producers have strong reluctance to budge on prices, providing some support for the bottom price. However, the acceleration of inventory buildup in construction materials this week has slightly highlighted fundamental contradictions, with a clear tug-of-war between longs and shorts. Considering that high temperatures and rainy weather will decrease in the second half of August, demand may improve to some extent. It is expected that spot prices for construction steel will still have upward momentum.

HRC: Expectation Disturbances Still Exist, HRC Prices Continue to Fluctuate

This week, HRC prices rose first and then fell, with spot prices increasing by 10-20 yuan/mt WoW. In terms of news, the Japanese Ministry of Finance issued an announcement, initiating anti-dumping investigations on hot-dip galvanized steel strips and plates originating from China and South Korea. In terms of supply, this week, the capacity utilization rate of HRC was 76.43%, up 0.47% MoM. Production reached 3.3783 million mt, an increase of 20,300 mt MoM. Looking ahead, the number of rolling line maintenance plans at steel mills next week will increase, with overall production expected to decline slightly. In terms of demand, recently, transactions in both the HRC and cold-rolled markets have been poor, with procurement willingness in the downstream demand sector remaining weak. New orders for automobiles and home appliances have gradually weakened. In terms of inventory, the total inventory this week was 4.33 million mt, an increase of 55,900 mt MoM, continuing the trend of inventory buildup. However, the absolute value is still at a historical low, and inventory pressure is relatively controllable. In terms of export order taking, recently, domestic profits have been relatively better than export profits. Some steel mills have adjusted their export shares in overseas markets, choosing to prioritize handling domestic trade orders. Additionally, China's export quotations are relatively high, with overseas customers being cautious in procurement. In terms of costs, last week, market rumors indicated that coal mine verification work and the sixth round of coke price increases had been implemented. Hot metal production also remained at a relatively high level in the short term, providing strong cost support. Therefore, in summary, it is expected that next week, HRC prices will continue to fluctuate sideways within the range of 3,400-3,550 yuan/mt.

Steel Scrap: Supply-Demand Pattern Difficult to Change, Market May Continue to Fluctuate Rangebound Next Week

On the supply side, affected by high temperatures, the output of raw steel scrap materials remains low, with overall resource supply being relatively tight. Some merchants have expectations of price increases, and the market's shipping rhythm has slowed down. On the demand side, currently, the profits of BF steel mills are still acceptable, and production enthusiasm remains relatively high. The profits of EAF steel mills have declined, with some electric furnace mills reducing their operating hours. According to SMM surveys, the operating rate of 50 major electric furnace steel mills producing construction materials nationwide this week was 39.9%, down 0.78% from the previous period. In summary, the supply-demand pattern in the steel scrap market this week has not changed significantly. It is expected that the steel scrap market will continue to fluctuate rangebound next week, and close attention should be paid to abnormal movements in the macro direction in the future.

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