Demand is weak, steel prices fall, some steel mills stop production ahead of schedule for maintenance and enter the "dormant period".

Demand is weak, steel prices fall, some steel mills stop production ahead of schedule for maintenance and enter the "dormant period".

Recently, a dedicated steel group internal retreat on the speech circulated on the Internet, the speech said, "the current steel industry into the industry-wide loss, the loss of when can not see the end, the extent of the bottom. To wait until 30% of the steel enterprises closed down, the steel industry can enter the break-even, normal operation of the state."

 

Coincidentally, Li Lijian, chairman of Anyang Iron and Steel Group, also emphasized at the group's second quarter cadre meeting that the current market situation is extremely severe, and the entire industry has experienced large-scale losses and continues to expand. In the "seven under eight" high temperature rainy season, the traditional off-season is coming, the situation is still not optimistic, production and operation are facing great challenges.

Since June, the domestic epidemic has been effectively controlled, logistics and transportation have been fully restored, and terminal enterprises have actively resumed work and production. However, the explosive demand growth that the steel market had expected before did not appear. On the contrary, the contradiction between supply and demand has intensified in the case of obvious accumulation of steel inventory. A large number of steel enterprises into a state of loss, some steel mills even choose to advance maintenance, into the market "dormant period".

 

Low-season demand pulls down steel prices

 

In the second quarter, under the influence of a series of factors such as repeated domestic epidemics, international geopolitical conflicts and Federal Reserve interest rate hikes, resulting in weak market demand and a sharp decline in steel traders' shipments, making many types of steel prices in the second quarter showed a volatile downward trend. Taking rebar as an example, data from the National Bureau of Statistics show that the spot price of rebar fell by 818.4 yuan/ton in the second quarter, especially in the middle and late June, with a cumulative drop of 518.2 yuan/ton, setting a new low in nearly seven months.

 

Monitoring data from the Lange Iron and Steel Cloud Business Platform also showed that as of the end of June, the national comprehensive steel price of Lange Iron and Steel was 4672 yuan, a decrease of 412 yuan from the end of the previous month, a month-on-month decrease of 8.1 percent, and a year-on-year decrease of 14.0 percent.

 

As early as March and April, the market generally expected that downstream demand would gradually recover after being unsealed in Shanghai, Jilin and other places, showing a trend of not weak in the off-season. But even in June, pent-up steel demand failed to release effectively. "Strong expectations" meet "weak reality", so that steel prices in a time of demand expectations fell in the air continued to bottom.

 

Wang Guoqing, director of the Lange Iron and Steel Research Center, told the 21st Century Business Herald that it is currently in the off-season of traditional demand, with high temperatures in the north and rainy rains in the south. The progress of projects in various places is difficult to overcome the seasonal impact. The steel market demand has dropped significantly, and the steel inventory continues to run at a high level. The Fed's substantial interest rate hike to curb inflation has led to a lack of market confidence and steel prices. In addition, as an important origin and circulation hub of the domestic steel industry, Shanghai's freight logistics with other regions in East China is actually still greatly hindered.

 

The G7 National Vehicle Freight Flow Index shows that Shanghai's vehicle freight flow has rebounded significantly since the end of May. As of July 3, it has recovered to 69.6 percent of the same period last year, and there is still much room for recovery. At the same time, there are 24 provinces and cities recently due to heavy rains and epidemics, vehicle freight traffic showed a month-on-month decline.

 

Xu Xiangchun, chief information officer of Shanghai Steel Union, pointed out in an interview with the 21st century economic report that the relatively low real estate investment and the continuous decline in the area of new housing starts are the main reasons for the sluggish demand. In the first five months of this year, the national commercial housing sales area and real estate new construction area cumulative year-on-year decline of 23.6 percent, 30.6 percent, down 2.7 percent, 4.3 percent, there is still a contraction trend. Although the construction machinery, home appliances, automobiles and other industries recovered significantly in June, it is still difficult to hedge the gap caused by the real estate downturn.

 

　Losses force steel mills to cut production

 

After experiencing a sharp drop in steel prices in mid-to-late June, the profit margins of steel companies have been severely compressed, and many steel varieties are facing large losses per ton of steel. This led to a spontaneous joint overhaul and production reduction by steel companies around the country, which to some extent led to a further decline in production in the second half of the month.

 

According to statistics from the China Iron and Steel Association, as of mid-June, the cumulative daily output of crude steel by key statistical companies was 2.2733 million tons, a decrease of 1.29 percent from the previous month; the daily production of steel was 2.1883 million tons, a decrease of 1.09 percent from the previous month.

 

Nanjing Securities Research Report estimates that the current gross profit of rebar and hot-rolled is about -267 yuan/ton and -344 yuan/ton, of which the impact of short-process rebar and hot-rolled is more obvious, with gross profit of -328 yuan/ton and -429 yuan/ton respectively.

 

Tangshan steel trader Zhao Liang (pseudonym) told the 21st Century Business Herald that under the influence of the mentality of "buying up but not buying down", most trade wholesalers still hold a wait-and-see attitude, making market demand even more tense. Many steel mills are also facing the dilemma of "production is loss", so they have chosen to stop losses in the off-season for blast furnace maintenance.

 

According to incomplete statistics from Mysteel, since June 20, a number of steel enterprises in 19 regions, including Hebei, Jilin, Ningxia, Shanxi and Shandong, have announced maintenance, and their efforts to reduce production and stop production are still expanding.

 

Wang Guoqing said that the average national blast furnace operating rate in June surveyed by Lange Iron and Steel Network was 81.6, down 0.6 percentage points from the previous month and 0.2 percentage points lower than the same period last year, showing a slight downward trend, putting pressure on domestic steel production to a high level in June. It is estimated that the daily output of crude steel in June will be about 3.1 million tons.

 

In addition, the inventory level in June is still higher than the same period last year. As of the end of June, the social inventory of steel in 29 key cities counted by Lange Steel Network was 14.277 million tons, up 2.5 percent month-on-month and 10.9 percent year-on-year. The digestion rate of social inventory of steel has also slowed down significantly compared with the same period last year, indicating that the current situation of oversupply is still obvious. Affected by this, steel mills' purchases of upstream raw materials decreased, the demand and prices of iron ore and coke fell in June, and the price of subsequent cost support will continue to weaken.

 

A few days ago, the China Industrial Association held a video forum to discuss how to deal with the grim situation in the current market. He Wenbo, secretary of the party committee of the association, particularly stressed that "the main problem in the current market lies on the steel demand side, but the realistic solution lies on the steel supply side. The whole industry should reach a consensus on this issue as soon as possible and take action."

 

Xu Xiangchun said that in order to solve the situation that weak demand leads to oversupply in the market, steel production enterprises need to take the initiative to reduce production and adjust. Although the cumulative output of crude steel in the first five months has decreased compared with the same period last year, the output of crude steel has increased month by month since the Spring Festival this year. If the average output of crude steel in the first five months is maintained at 87.13 million tons in subsequent months, the annual output of crude steel will reach 1.046 billion tons, slightly exceeding last year's 1.031 billion tons, which is not in line with the overall target of continued reduction of crude steel output this year. If crude steel production continues to rise in the following months, it will further aggravate the pressure on the supply side. At that time, the supervision of relevant departments will be strengthened, which will also push up steel prices to a certain extent.

 

In June, some provinces have begun to implement the crude steel reduction policy, and put forward clear crude steel reduction targets for steel enterprises. Shandong Province issued the "2022 crude steel production control work plan", the annual crude steel production control target is not more than 76.5 million tons, but the plan does not specify the specific proportion and range of production reduction, the final control target will be adjusted according to the state officially issued control tasks.

 

"At present, short-process steel mills are mainly reducing production after losses, but they only account for about 10% of the total output of the industry, and the effect is limited. More efforts are needed to reduce production in long-process steel mills in order to effectively release the pressure on the supply side." Xu Xiangchun said.

 

Huatai Securities predicts that although there is room for a slight increase in crude steel output in the second half of 2022 compared with the same period last year, the output in the second half of last year will be relatively low, so the crude steel output in the second half of the year will have an average daily reduction of more than 300000 tons.

 

July steel market or shock small rebound

 

In the overall downturn in the market, many enterprises are also adjusting the follow-up business strategy.

 

"In the face of this round of cruel market competition, we must firmly grasp the optimization and upgrading of varieties." Liu Jianrong, Secretary of the Party Committee and Chairman of Xingang Group, said during a survey at the coil factory in early July that a new round of market competition has arrived. In the end, who can survive is who has better quality brands, more flexible response methods and stronger profitability. In the second half of the year, the company's business strategy, cost control and other work should be adjusted significantly, and the key grasp of variety and cost should be done well and carefully.

 

Northwest Liangang held a board meeting on July 3, suggesting that all steel enterprises in the region formulate production restriction plans and earnestly implement the production reduction plan. At present, the production capacity of the shareholders of Northwest United Steel is nearly 70 million tons, and each member unit plans to take the lead in limiting production by 10%-30% in an orderly manner, making efforts from the supply side, adhering to the principle of no order and no production, and playing a positive role in maintaining the market.

 

Zhao Liang told the 21st Century Business Herald that in the current situation of large-scale losses in the industry, all trading links are waiting for the market to improve as soon as possible to reduce the inventory of products and intermediate products, while looking for concentrated and stable downstream trading customers, so as to maintain the normal operation of capital flow.

 

For the future of the steel market, the industry is cautiously optimistic.

 

According to Wang Guoqing's analysis, the downward pressure on the global economy eased slightly in June, but inflationary pressures continued to rise, monetary tightening policies continued to be introduced in various countries, and the impact and suppression of the Fed's interest rate hike and the global interest rate hike on commodities continued to increase. However, from the perspective of the domestic environment, the steady growth policy continues to exert force. The 3.45 trillion yuan special bonds issued this year have been basically issued at the end of June, which will be conducive to the rapid landing of infrastructure projects in the second half of the year and provide favorable conditions for the formation of physical workload in the third and fourth quarters, thus raising the overall expectation of rising steel demand in the second half of the year. According to a comprehensive judgment, the domestic steel market will show a slight rebound in July, but in the end, it will have to wait until the traditional peak season of "Golden Nine and Silver Ten" to see a significant recovery.

 

According to the analysis of the Iron and Steel Logistics Professional Committee of the China Federation of Logistics and Purchasing, a considerable number of enterprises have suffered from operating crises after the impact of the epidemic, which may have a certain impact on the later credit investment. Therefore, in the industry and the choice of enterprises, funds to avoid risks in advance will also delay the recovery of the real economy, and the related steel demand will also rise weakly. Although the manufacturing and construction industries will gradually recover as the policy of stabilizing the economy continues to land, there is limited room for steel demand to pick up in the short term. On the whole, the overall market demand continued to be weak in July, steel mill production remained low, steel and raw material prices fluctuated at low levels, and market demand may be released after September.

 

(Source: 21st Century Business Herald)