Cost Support Weakens, Ferrous Metals Series May Continue to Operate in the Doldrums [SMM Steel Industry Chain Weekly Report]

Forecast for next week: Weaker cost support, ferrous metals series may continue to fluctuate in the doldrums

This week, the ferrous metals series saw a pullback from high levels. At the beginning of the week, there were rumors that blast furnaces in Tangshan would be subject to 40% production restrictions by the end of August, leading to a decline in raw material prices. Although lower production is beneficial for finished products, the collapse of cost support pushed prices to their lowest point in nearly a month. In the latter half of the week, news spread that enforcement on purchase orders was tightening, and actions had already been taken at southern ports, with HRC experiencing a more pronounced decline compared to rebar, narrowing the price gap between the two. In the spot market, speculative demand for positive arbitrage still entered as the spot-futures price spread narrowed, but high temperatures and rainy weather suppressed the recovery of end-use demand. In the short term, according to SMM survey tracking, hot metal output increased slightly by 200 mt this week, but with the approaching parade, hot metal production is expected to drop to a lower level at the beginning of September, indicating a continued weakening trend in cost support. For steel, the current round of environmental protection-driven production restrictions mainly affected section steel, having limited impact on rebar and sheets & plates production. With high steel mill profits, the output of the five major types of steel will remain high, while the recovery in demand will take some time, potentially leading to further inventory accumulation. Overall, the positive impact of production restrictions on finished products is limited, and the recent collapse of cost support is likely to be the main driver. The ferrous metals series is expected to continue to fluctuate in the doldrums in the near term.

Iron ore: Stricter environmental protection measures suppress prices, leading to weaker performance

This week, iron ore prices dropped slightly. Due to deteriorating air quality in Tangshan, which triggered a Level II orange alert, steel mills have scheduled maintenance for their blast furnaces, and it is expected that hot metal production will significantly decrease, weakening market sentiment. Macro perspectives are mixed with limited impact, and overall ore prices showed a narrow rangebound fluctuating trend. Regarding port prices, the weekly average price of PB fines at Shandong ports fell by 10 yuan/mt MoM.

Looking ahead to next week, imported ore supply is expected to increase slightly, but port arrivals will remain at low levels. On the demand side, with blast furnaces in Hebei gradually shutting down, hot metal production is set to pull back. If air quality worsens again, cities like Handan and Cangzhou may also see blast furnace shutdowns, further suppressing hot metal production, indicating a weakening trend in the fundamentals of iron ore. However, considering the relatively short duration of this round of environmental protection-driven production restrictions and the growing expectation of a US Fed interest rate cut in September, which provides some support to prices, it is anticipated that iron ore prices will continue to fluctuate in the doldrums next week. Close attention should be paid to the potential impact of changes in northern air quality on production restriction policies.

Coke: Downstream steel mills have restocking needs, short-term prices may hold up well

Key points: News-wise, the seventh round of coke price increases by 50-55 yuan/mt has been announced by major steel mills in Hebei and Shandong. In terms of supply, coking coal enterprises have seen some improvement in profits, leading to a slight increase in production enthusiasm and an increase in supply. Coking coal enterprises have smooth shipments, and overall inventory pressure is relatively small. On the demand side, the dates for production restrictions at steel mills in the Tangshan area have been confirmed, and subsequent coke demand may decline. However, steel mill profits remain moderate, and the decline in hot metal production has been slow, resulting in a rigid demand for coke. Regarding the raw material supply-demand imbalance, the pace of coal mine resumption of production has been slower than expected, and new coal mine production suspensions have emerged. The overall supply of coking coal has recovered slowly, with downstream terminal procurement slowing down. Coal mine shipments have weakened overall, with fewer new orders signed. High-priced resources have seen weak transactions, and the proportion of failed online auctions has risen rapidly. Prices for some coal types continue to adjust slightly. In summary, due to production restriction policies related to the military parade, it is difficult for coke supply to increase significantly. Downstream steel mills have a demand for restocking coke, and the coke market may operate generally stable with slight rise in the short term.

Rebar: Supply-demand imbalance intensifies, panic sentiment affects price stability

This week, rebar prices first rose and then fell. The current nationwide average price is 3,206.2 yuan/mt, down 44 yuan/mt MoM. On the supply side, the profits of blast furnace steel mills have been compressed recently, with some east China manufacturers slightly reducing production. Steel mills in other regions are mostly operating normally. Production suspensions at steel mills in the Beijing-Tianjin-Hebei region mainly affect products such as profiles. The decline in steel scrap prices has not been as significant as that of finished products, and some EAF steel mills producing small-sized rebar are basically operating around the break-even point, maintaining their previous production hours in the short term. On the demand side, there is still some release of speculative procurement demand this week. However, the falling price trend combined with hot and rainy weather has led to a wait-and-see attitude among downstream buyers, resulting in generally moderate overall transactions. During the transition from off-season to peak season, there are no obvious signs of demand improvement yet. Overall, during the vacuum period of macroeconomic news, market transactions have returned to fundamental logic. However, with inventory accelerating and inventory buildup higher than the same period last year, merchants' panic sentiment has intensified, putting pressure on spot price increases. It is expected that the spot price of construction steel may be in the doldrums next week. Attention should be paid to logistics and transportation restrictions and project construction conditions in the Beijing-Tianjin-Hebei region next week.

HRC: Weak market demand during off-season may push down HRC prices next week

This week, the HRC market has continued to weaken, with prices falling continuously and overall transactions decreasing compared to last week. In terms of supply, some steel mills have started a new round of maintenance cycles this week, resulting in a decline in HRC production. On the demand side, the impact of the off-season has been significant, with weekly apparent demand for HRC decreasing significantly. In terms of inventory, according to SMM statistics, the nationwide social inventory of HRC in 86 warehouses (large sample) is 3.4237 million mt this week, up 118,900 mt MoM, or 3.62% MoM. The nationwide social inventory continues to accumulate. By region, except for a slight decrease in central China, all other regions are experiencing inventory buildup, with east China seeing the largest increase in inventory. Cost side, coke prices saw their seventh round of increases (50-55 yuan/mt) on Friday, while iron ore prices made a slight downward adjustment. The cost support for HRC remained stable overall. On the macro front, at the beginning of the week, there were rumors that blast furnaces in Tangshan would be subject to 40% production restrictions by the end of August, leading to a pullback in raw material prices. Although lower production is beneficial for finished products, the collapse in cost support pushed prices to their lowest level in nearly a month. In the latter part of the week, news of stricter enforcement against fake orders and actions taken at southern ports led to a more pronounced decline in HRC compared to rebar, narrowing the price gap between the two. Looking ahead, with no further increase expected in coke prices and iron ore prices likely to continue a slight downward trend, the overall cost support remains weak. Coupled with weaker demand during the off-season, inventories of the five major finished steel products may continue to rise, and the most-traded HRC contract is expected to fluctuate downward within the 3,260-3,410 range next week.

Steel scrap: Stalemate in supply and demand, prices may fluctuate downward next week

On the supply side, due to high temperatures and frequent rain, the manufacturing sector has slowed down, resulting in limited industrial waste generation and relatively tight steel scrap supply. On the demand side, profits of both BF and EAF steel mills declined this week, reducing their willingness to increase production. According to the SMM survey, the operating rate of EAF steel mills was 39.9%, unchanged from the previous period, making it difficult for daily steel scrap consumption to grow. Overall, the supply-demand pattern of the steel scrap market has not changed much this week. In the short term, before any significant improvement in end-use demand, steel mills are cautious about purchasing steel scrap, and steel scrap prices still face some downward pressure. Subsequently, close attention should be paid to the maintenance schedules of steel mills and the destocking situation.

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