China: Steel prices under pressure as demand weakens

Yesterday's ferrous prices remain soft with raw materials weaker than steel. From ZhaoGang and GangGuWang steel data, it is apparent that construction steel demand has decreased seasonally. If steel demand worsens w-o-w; steel futures may have more room to decline than raw materials. SHFE rebar could retreat closer towards the lower bound cost support. In this policy void, new drivers are needed for prices to find a direction. Factors to monitor 1) lull season steel demand and inventory changes. 2) coking coal production changes. 3) macro policy developments and effects.

This is also partly due to a heavier dragon boat rainfall than in other years around the Pearl River basin. Nonetheless, there is a risk of construction and flat steel inventory building up this week. Next week's data may also be weighed down by the Dragon Boat Festival holiday.

Suppose today's Mysteel data reveals that rebar demand deteriorates from last week's 2.49 million tonnes (mnt). This could lead to a faster decline in steel futures to at least narrow the futures production margins which have widened passively due to a faster decline in raw materials. SHFE rebar will then retreat to around CNY 3,500-3,550/t, which is below/close to its lowest production costs to reflect the current weak reality.

For raw materials, without an apparent demand push (whether it is from infrastructure projects or basis trade entries), hot metal production is taken to have peaked and is expected to fall. This has led to a continued and faster retreat in raw materials futures over the recent weeks.

Iron ore and coking coal have reached our lower bound price valuation of CNY 820 and CNY 1,600. Both raw materials (especially iron ore) have already declined to the lowest since early April when hot metal was just bottoming out from 2.2 Mt/day. Hence, at the moment, there may be limited room for raw materials to fall unless we enter a negative feedback loop in which a more severe production cut is expected.

Under a more beairsh scenario, the average daily hot metal production could retreat towards 2.32Mt-2.35Mt/day.

Note: This article has been written in accordance with an article exchange agreement between Horizon insights and BigMint.