Cost support shifts downward, but finished product supply contraction provides a floor [SMM Steel Industry Chain Weekly Report]

Forecast for next week: Cost support shifts lower, but finished steel supply contraction provides a floor

This week, the market was largely closed during the first half of the week due to the National Day holiday. During the holiday, the first round of coke price cuts was implemented. After the holiday, iron ore restocking demand weakened, and negative feedback on the cost side continued to transmit, with finished steel prices falling under pressure in tandem. On the raw material side, domestic news was mediocre during the holiday, but overseas iron ore swaps fell more than 2%, disturbing sentiment in China's ferrous metals market. During the holiday, the first round of coke price cuts was implemented, and after the holiday, the resumption of Mongolian coal customs clearance brought import growth, followed by the initiation of a second round of coke price cuts, pushing the cost center further downward. In addition, hot metal output bottoming out provided limited support for iron ore prices, and the raw material side overall dragged down spot prices. On the finished steel side, production and sales data for the five major steel products showed that supply pressure continued to ease. Post-holiday demand had not yet fully kicked in, and mill inventories and social inventories accumulated in phases. However, some resources remained concentrated in the hands of steel mills, which showed strong willingness to hold prices firm, so finished steel prices fell by a relatively limited margin.

In the short term, on the cost side, according to SMM survey tracking, multiple steel mills scheduled blast furnace maintenance during the holiday, and post-holiday daily average hot metal output was still down WoW from pre-holiday levels. Coupled with steel mill profits still in loss-making territory, hot metal output will remain low in the short term, providing weak support for iron ore prices. Iron ore is expected to be under pressure. A second round of coke price cuts has been initiated, but steel mill losses have not yet been repaired, and the market still holds expectations for a third round of cuts, with cost support continuing to shift lower. On the finished steel side, post-holiday demand has not yet been significantly released, and inventory is in a routine accumulation phase. Supply-demand fundamentals are unlikely to drive prices higher in the short term, limiting upside. Overall, ferrous metals will remain disturbed by raw material news in the short term, and cost concessions may limit the upside elasticity of finished steel. However, the supply-demand imbalance in finished steel is not prominent, and bottom-level prices still have support. Prices are expected to move sideways in a narrow range next week, with no trending market likely. Going forward, focus should be on the pace of finished steel demand release.

Iron ore:Fundamentals under pressure, iron ore remains in the doldrums

The first week after the holiday had only two trading days. The most-traded iron ore contract extended its pre-holiday weak trend, falling more than 3% on the first day, with significant downward pressure. Specifically, on the one hand, ocean freight rates pulled back during the holiday, weakening cost support for iron ore. On the other hand, although coke prices completed one round of cuts, providing some repair to steel mill profits, most steel mills remained in a loss-making state, hot metal output continued to decline, and overall iron ore demand weakened. On the supply side, squeezed by both falling ore prices and rising ocean freight rates, some non-mainstream mines implemented production cuts, but mainstream mines remained at peak shipment periods, and overall supply still had growth expectations in Q4, keeping iron ore fundamentals under pressure overall. Iron ore prices continued to slide under the combined effect of multiple factors. Looking ahead to next week, from a fundamental perspective, global iron ore shipments are still in a growth cycle, and port arrivals also remain high. On the demand side, performance is weak, with no improvement in China's demand, and steel mill hot metal production is expected to decline. The pattern of strong supply and weak demand is weighing on iron ore prices. However, considering that end-use demand has not yet entered the off-season and overseas demand has improved somewhat, steel mill profits have recovered after the decline in coke prices, leaving limited downside for hot metal production going forward. Iron ore demand still has some support, so iron ore prices are expected to remain bearish in the short term, but with relatively limited downside.

Coke: Coking coal raw material prices fell significantly; the second round of coke price cuts is about to take effect next week

Key points: On the news front, steel mills in some regions implemented a second round of purchase price cuts for coke, with coke dry quenching reduced by 100 yuan/mt and coke dry quenching reduced by 110 yuan/mt, effective from 00:00 on October 12. In terms of supply, improved profits have encouraged coke producers to increase output, and coke production has continued to rise. However, the shortage of high-quality coking coal has limited the release of capacity. Although current production has rebounded from low levels, it remains below the same period in previous years. Most coke producers maintain zero or low inventory and have no sales pressure for the time being. On the demand side, the September peak season fell short of expectations, but steel mill hot metal production stayed at a relatively high level, creating rigid consumption of coke. However, steel enterprises are generally loss-making and resistant to high-priced raw materials, so procurement is cautious. Coke inventory remains at a medium level, and expectations for production cuts at steel enterprises are rising, with some already arranging maintenance, weakening rigid demand. For coking coal, prices are currently under dual pressure from weak reality and weak expectations, consolidating on a subdued note in the short term. On the supply side, slow production resumptions and low inventory are underpinning prices, but supply guarantees continue to advance and expectations for production resumptions are strengthening. Many auctions have failed to attract bids, and negative feedback on the demand side is intensifying, weakening coking coal demand. Overall, in the first week after the holiday, coke supply continued to recover, while steel mill maintenance increased and raw material costs loosened. Coke still faces downward price pressure, and the coke market is expected to remain in the doldrums next week.

Steel scrap: Supply-demand imbalance is not prominent for now; prices are expected to consolidate in the short term

On the supply side, most sites of state-owned enterprises were closed during the holiday, so steel scrap arrivals were low, and it will still take time for resource arrivals to recover after the holiday. On the demand side, there was no concentrated restocking of finished steel products by end-users after the holiday, and overall spot trading was mediocre. Finished steel prices lacked upward momentum, and steel mill per-tonne profits remained under pressure. Meanwhile, multiple rounds of coke price cuts have taken effect, and iron ore is consolidating on a subdued note. Hot metal has become more cost-effective than steel scrap, so the attitude toward steel scrap procurement is cautious. Overall, the supply-demand imbalance in steel scrap is not prominent for now. Steel mill steel scrap inventories have declined, and it cannot be ruled out that some steel enterprises may have passive restocking demand going forward, which would provide some support to the steel scrap market. The steel scrap market is expected to consolidate in the short term.

Rebar: Prices to move sideways in the short term with no trending market
Most markets were closed during the holiday, and with no notable macro news in China, rebar prices were stable over the holiday. After the holiday, a few markets followed the decline due to negative raw material news, but overall prices consolidated after the holiday. On the supply side, blast furnace steel mills remained loss-making. During the holiday, mills in east, north, and central China added bar and wire rod maintenance, and some hot metal was diverted to product grades, leading to a notable drop in construction steel production. EAF steel mills saw overall margins near break-even, with production mostly maintained at prior off-peak and peak power levels, so output changed little. On the demand side, construction at some end-user projects was restricted during the holiday, and with stockpiling already done before the holiday, overall demand pulled back notably. On the inventory front, previously locked cargoes for agents continued to arrive normally during the holiday, while downstream purchases slowed down. Construction steel mill inventories and social inventories were in a routine inventory buildup phase. Looking ahead, demand after the holiday is unlikely to show much improvement, and supply-demand fundamentals lack driving force, limiting upside. However, with steel mills still loss-making on a large scale, production incentives are weak, and supply-side pressure is relatively small, which underpins prices at the bottom. Therefore, short-term prices are expected to be stuck in a two-sided bind, with no trending market likely. Still, attention should be paid to whether October peak season demand materializes, as a phased release of demand could drive a rebound.

HRC: Cost support weakening, supply-demand imbalance manageable, HRC prices may consolidate on a subdued note next week

HRC prices consolidated this week. Post-holiday transactions were poor overall, and market sentiment lacked improvement. In terms of supply, rolling line maintenance increased slightly this week, and overall HRC production edged down. On the demand side, downstream buyers made small restocking purchases of HRC after the holiday. The auto and home appliance sectors were weak overall, while the machinery sector barely held up. Demand recovery was sluggish, and HRC faced inventory buildup pressure. On the inventory front, this week SMM's nationwide HRC social inventory across 86 warehouses (large sample) stood at 4.915 million mt, up 308,200 mt WoW, or up 6.69% WoW. By region, all markets across the country saw inventory buildup, with larger increases in east and north China. On the cost side, the first round of coke price cuts was implemented during the National Day holiday, and iron ore prices also fell, weakening HRC cost support. Looking ahead, some steel mills have already initiated a second round of coke price cuts, and iron ore prices are expected to continue falling. HRC cost support is insufficient, but the supply-demand imbalance in HRC is not prominent, limiting the downside.In summary, the most-traded HRC contract is expected to trade in the 3,220-3,290 range next week, consolidating on a subdued note.

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