What to expect from Chinese steel market in May 2024?
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We tend to view that recent ferrous commodities price fluctuations have less to do with ferrous fundamentals but more to do with changes in investment funds' behaviour. In general, unless there is an acceleration in steel mills' resumption, increasing the risk of imbalances, the general direction for ferrous is bullish.
Between April and May, the market will focus on the rate of production increase and the impact on inventory. Moving into June, if inventory is at a seasonal low, the room for hot metal production to increase will widen. Hence, hot metal production is expected to have bottomed. Within the ferrous industry chain, margins will be allocated more to coking coal due to its low supply elasticity. Its reign through 2024 will depend on whether Shanxi's mining control will extend beyond May. If so, coking coal supply tightness will become more apparent in the second half of second quarter of 2024 (2H of Q2 2024).
This week's ferrous commodities price fluctuations were relatively spontaneous; just like yesterday's upbeatness. In our view, we tend to think that it has less to do with ferrous fundamentals but more to do with changes in investment funds' behaviour relating to precious metals, non-ferrous, and coal trades which have a high concentration of long positions.
The main risk for ferrous is whether flat steel production will increase rapidly as this can exacerbate its heavy inventory condition. Its consumption is relatively firm. Hence, unless production continues to increase, we are at a stage in which construction steel production can increase while flat steel is destocking.
Under the current expectation that hot metal production will continue to increase (which will be contributed by construction steel), ferrous margins will be allocated more to raw materials, especially to the product that has a relatively low supply elasticity; and that will be coking coal, followed by iron ore.
Coking coal production has stayed at a seasonal low, mainly due to mining curbs in Shanxi rather than profitability. In Shanxi's February release of the document regarding above-capacity coal mining, it has indicated that the curbs will be applicable through May. Hence, coking coal's reign through 2024 will depend on whether the mining control will be extended beyond May. If the tight control persists, there will be no change to the expectation of a supply gap. Inventory has been staying at a seasonal low despite the low hot metal output. Upstream mines' inventory also started to decrease last week.
The drawdown in mines' inventory is partly due to an increase in 1) downstream restocking interest as prices increase, as well as, 2) basic trade entry due to its contango structure. Inventory is essentially being transferred downstream.
The improvement in demand and destocking at mines have led to spot coking coal prices bottoming out.
Looking ahead, the general trend is bullish (at least before the end of June). This comes as steel inventory is at an absolute low which lowers the risk of a severe imbalance between April and May. During this period, the market will focus on the rate of production increase and the impact on inventory. This comes as there is a high emphasis on steel inventory drawdown during the period. However, moving into June, if inventory is at a seasonal low, the room for hot metal production to increase will widen. This comes as there is a lower requirement for inventory to destock.
Under this scenario, hot metal will maintain an uptrend which will be the most supportive of raw materials. Unless there is another negative price loop or Shanxi's policy change, given the expectation of a supply gap, coking coal will still be the most ideal for long positions. Based on a simulation of coking coal production, its supply tightness will become more apparent in the 2H of Q2 2024.
Note: This article has been written in accordance with an article exchange agreement between Horizon insights and BigMint.
