China steel market expected to bounce back in July

• June sees downtrend in steel sector
  
  
• July may see uptick in sentiments
  
  
• Outlook on second half bullish
  
  

Morning Brief: In June, China's domestic steel market prices fluctuated downward. Prices of iron ore and coke fell, and the cost support to steel prices was weak. The growing impact of the policy implementations was felt.

June: An overview

• Demand downtrend hits prices: In June, the impact of the off-season was marked. The high temperatures in the north and rains in the south affected normal construction activities, which hit downstream steel demand. This did not support prices. The domestic steel market showed a decline. Steel prices were at RMB 4,672/tonne (t) ($697/t), down RMB 412/t ($61/t) or a m-o-m drop of 8%, and a y-o-y decrease of 14%. Long products were at RMB 4,452/t ($664/t), down RMB 404/t ($60/t), or 8.3% m-o-m and down 12% y-o-y. Prices of flat products were at RMB 4,755/t, down RMB 415/t or 8% m-o-m and 16.5% y-o-y. Prices of all items dropped significantly m-o-m. Hot-rolled coils fell the most at 9% and seamless pipes fell the least, by 5.2%.
  
  

Since June, with the increasing drop in steel prices, the profit margins of steel mills have been severely squeezed. The average operating rate of blast furnaces in June was 81.6%, down 0.6 percentage points m-o-m.

Due to the increasing losses of mills, maintenance and production cuts, domestic steel production in June was under pressure. The daily output of crude steel in June may remain at about 3.1 mnt (3.116 mnt in May).

• Social inventory rises: In June, due to the obvious lack of demand in the off-season, the social inventory of steel rose. End of June, the social inventory in 29 key cities was 14.277 mnt, a m-o-m increase of 2.5% and a y-o-y increase of 10.9%.
  
  
• Falling raw material prices: In June, with the resurgence in iron ore supply and shipments, as well as the increased losses of mills and the maintenance and repair undertaken led to a decline in iron ore demand and prices. In end of June, the average price of 66% dry base iron concentrate in Tangshan area was RMB 975/t, ($146/t)down RMB 130/t ($19/t) or 11.8% m-o-m. In terms of imported iron ore, Australia was RMB 61.5/t ($9/t) down. The average market price of fine ore in Rizhao Port was RMB 875/t, ($131/t) down RMB 110/t ($16/t) or 11.2% m-o-m.
  In June, coke prices remained volatile. Average prices of secondary metallurgical coke in Tangshan in June were at RMB 3,125/t ($446/t), down 8.6% m-o-m.
  The decline in prices of iron ore and coke failed to support steel prices.
  
  

How will July pan out?

At present, the global economy is facing downward pressures. The impact of the Russia-Ukraine conflict on steel production has weakened, supply in overseas markets has improved, but global steel demand is facing uncertainty. It is expected that exports of steel may fall, going forward.

July is traditionally a low season for demand. The north will face high temperatures and the south, the impact of the rainy season. The progress of construction projects in various places will still be affected by season vagaries.

But factors such as abundant funds, sufficient projects in hands, accelerated construction activity and policy support will keep sentiments buoyant.

Encouraged by the construction industry, accelerated infrastructure investment will drive the consumption of construction steel and July may thus see some room for improvement in demand.

Market participants assume that prices will be better with lesser supply pressure and better demand seen after July. Weekly data shows less output and 0.7 mnt less inventory.
Although downstream demand is still subject to seasonal constraints, there will be room for its increase m-o-m in July. Market confidence has improved. It is felt that the domestic steel market will show a rebound in July.

Second half to be better?

The PMI index continued to rise in June, indicating an overall recovery of the economy.
It is expected that manufacturing will continue to recover in H2, driving the gradual increase in demand for flat steel too.

Major infrastructure projects with adequate funding, will help the demand for infrastructure steel to pick up in the second half (H2).

Most Chinese investors feel that H2 will see further investments and supportive action to run businesses which will bring more prosperity.

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