Under Macro Drivers, the Short-Term Black Commodity Chain May Still Have Room for Upside [SMM Steel Industry Chain Weekly Report]

Forecast for Next Week: Macro Drivers May Provide Short-Term Upside for Ferrous Chain

This week, ferrous metals extended a pattern of rising first then stabilizing, with most-traded contracts completing rollovers. Early in the week, the central environmental inspection team disclosed environmental issues in Tianjin and Hebei, specifically naming Tangshan, Hebei for unauthorized steel projects and capacity additions. Meanwhile, as December began, anticipation built for two upcoming major domestic macro meetings, strengthening market expectations and pushing ferrous metals higher. Later in the week, the daily average hot metal output tracked by SMM continued to decline, weakening raw material support. Combined with market chatter about the Politburo meeting suggesting potential disappointment versus expectations, the ferrous chain's rally paused. In the spot market, trading sentiment was moderate in the first half of the week, but transactions were mainly at low prices and lacked sustainability.

Short-term, according to SMM survey tracking, daily average hot metal output fell 6,800 mt WoW. Some steel mills in Hebei and Shandong still have additional maintenance plans, suggesting a continued downtrend in hot metal production ahead, further weakening support from the raw material side. For steel products, inventories of the five major steel products continued to draw down. Although demand remains characteristic of the off-season, overall pressure is relatively small under the expectation of declining supply. Overall, with key domestic meetings and the US Fed meeting approaching, macro factors are gaining weight in trading. While fundamentals currently offer no new upward drivers, supported by macro expectations, prices may still find momentum to rise. However, vigilance is warranted against pullback risks after these events conclude.

Iron Ore: Weaker Demand Weighs on Prices, Expected to Remain in the Doldrums Next Week

Iron ore prices followed a pattern of rising then falling this week, with futures prices pulling back after an initial surge. Despite strong macro sentiment, persistent declines in hot metal output widened the supply-demand gap, and high port inventories pressured ore prices. The weekly average price for PB fines at Shandong ports dropped 1 yuan/mt WoW. Domestic iron ore concentrate prices showed regional divergence: prices held steady in Tangshan, Qian'an, and Qianxi in Hebei; also little change in Chaoyang, Beipiao, and Jianping in western Liaoning; prices in east China edged up 5-10 yuan/mt. Looking ahead, the upcoming Central Economic Work Conference may sustain a warm macro mood. However, increased year-end maintenance at steel mills is expected to accelerate the decline in hot metal output, keeping overall iron ore demand weak. With port inventories already high, overall inventory pressure will likely cap ore prices, despite some structural support for specific grades. Overall, iron ore prices may trend higher early then lower later next week, with the weekly average price dipping slightly WoW.

Coke: Market May Continue in the Doldrums, Second Round of Price Cuts Expected Next Week

Supply side, after the first coke price cut, coking coal prices also fell, improving coke plant margins. Operating rates remained high, leading to increased coke supply. However, downstream purchase enthusiasm waned, causing passive inventory buildup at coke plants. Demand side, steel mills currently have further production cuts and maintenance plans, intending to take this opportunity to pressure the raw material side and attempt to initiate a second round of coke price reductions. Therefore, steel mills slowed down their coke procurement pace, mostly making just-in-time procurement. On the raw material fundamentals, previously suspended or reduced coking coal mines resumed production slowly, with limited supply release. However, downstream buyers maintained just-in-time procurement for coking coal, with many adopting a wait-and-see attitude. Coal mines faced shipment pressure, and online auction transactions were still predominantly lower. Market sentiment continued to weaken, and coking coal prices were still expected to fall in the short term. In summary, the coke market may continue in the doldrums in the short term, with expectations for a second round of price reductions.

Steel Scrap: Prices Continue Sideways Movement Amid Tug-of-War Between Sellers and Buyers

Supply side, as winter temperatures drop, construction site operating rates decline, leading to reduced steel scrap output. Traders were relatively cautious; to avoid operational risks from price fluctuations, they generally adopted a quick-in, quick-out strategy, with little willingness to actively stockpile. Demand side, the profitability of EAF steel mills has improved significantly. According to SMM survey data, 10 EAF mills collectively extended operating hours this week, driving the nationwide EAF operating rate up to 39.1%, a rise of 2.18% WoW. Overall, the steel scrap market continues in a state of tight balance, with the supply-demand imbalance not yet prominent. Therefore, subsequent steel scrap prices are expected to mainly move sideways.

Rebar: Insufficient Fundamental Driving Force, Short-Term Movement Likely Driven Mainly by Sentiment

This week, rebar prices fluctuated upward, with the current nationwide average price at 3,190 yuan/mt, up 40 yuan/mt WoW. Supply side, profitability for both blast furnace and EAF routes improved compared to the previous period. Some EAF mills further increased operating hours this period, leading to a slight increase in the operating rate. However, annual maintenance at blast furnace mills had not yet ended, and steel mills in Hubei province conducted concentrated maintenance in December, with building material rolling lines either fully halted or operating at half capacity, resulting in relatively significant production cuts. Demand side, early in the week, the market was driven by sentiment, with trading atmosphere relatively active, especially in south China and east China where transactions were moderate. However, as winter sets in in the north, demand gradually entered a semi-stagnant state. It is understood that north-to-south steel resources in transit are mostly based on prior agreement volumes. After the recent price increase, some steel mills reported severe price inversions on previously accepted agreement volumes. Later, they are likely to prioritize exporting steel billets, making southbound resources relatively limited. Looking ahead, after December annual maintenance, steel mills will continue to prioritize producing variety steels, with planned production continuing to decrease. Supply-side pressure is relatively small, inventory is continuously easing, and fundamentals are relatively healthy, providing support for bottom prices. However, seasonally weakening demand can hardly support upward momentum for spot prices. Rebar price trends will continue to be dominated by sentiment fluctuations. Short-term macro news disturbances persist, and spot prices are expected to move sideways in the short term.

Hot Rolled Coil: Macro Expectations Gradually Warm Up, Prices May Continue to Rise Next Week

This week, hot rolled coil prices held up well, with the price center moving higher, but market wait-and-see sentiment increased, and overall trading activity weakened somewhat. Supply side, steel mill hot rolling line maintenance increased this week, and hot rolled coil production saw some increase. Demand side, market demand performance slightly worsened this week, with total weekly apparent demand for hot rolled coil decreasing. Inventory side, this week, SMM statistics for 86 national warehouses (large sample) showed social inventory of hot rolled coil at 4.2082 million mt, down 1.13% WoW, and national social inventory declined again. Cost side, the first round of price cuts was implemented this week, iron ore prices also fell, and cost support for hot rolled coil weakened. Macro news side, the Politburo meeting and the Central Economic Work Conference are approaching, and the US Fed is highly likely to cut interest rates, which is positive for commodity prices. Looking ahead, coke and iron ore prices are both expected to fall next week, hot rolled coil costs may slightly decrease, but hot rolled coil inventory may continue destocking, coupled with gradually warming macro expectations, hot rolled coil prices may continue to rise. The most-traded contract for hot rolled coil is expected to trade in the range of 3,280-3,380 next week.

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