Judging from the PMI of China’s steel industry surveyed and released by the China IOT Iron and Steel Logistics Professional Committee, the index was 43.1% in July, a decrease of 2.0 percentage points from the previous month, and it was in the tightening range for the 14th consecutive month. The sub-indices showed that steel production slowed down in July, market demand continued to be weak, and the overall downward pressure on the market increased. It is expected that market demand will rebound in August, and both ends of supply and demand will develop in balance, and steel prices will have room for upside.
The off-season factors continue to show up, and steel demand continues to be weak. In July, due to heavy rainfall and typhoon weather in many places, floods in some areas were more serious, and extreme weather and disasters lasted for a long time, which had a greater impact on downstream steel industry activities, such as a significant reduction in steel demand for construction sites. The new order index was 36.8%. Although it increased by 2.0 percentage points from the previous month, it was still at a low level. It was below 40% for three consecutive months, indicating that the market demand remained weak and the off-season characteristics were obvious.
At present, overall domestic demand has declined due to the off-season impact of East China and South China markets and short-term external factors. In July, the average daily purchase volume of terminals on the Shanghai Stock Exchange fell by 12.7% from the previous month. In terms of exports, considering changes in export policies, steel mills are more inclined to increase domestic trade. The new export order index was 30.8%, a decrease of 11.5 percentage points from the previous month.
Steel production has slowed down significantly, and the pressure to reduce production tends to increase. In July, compared with the overall weak demand, steel mills’ production slowed down and increased pressure to reduce production became the focus of the market’s attention. The extreme weather during the month had a certain impact on the production of iron and steel enterprises in the eastern and central regions. In addition, the production restriction and production reduction policies in some areas have achieved results, and steel production has slowed down significantly during the month.
The production index was 43.1%, a decrease of 7.6 percentage points from the previous month and the lowest level in the past 16 months. According to statistics from the China Iron and Steel Association, in mid-July, key statistical steel companies produced an average daily crude steel output of 2.164 million tons, a decrease of 7.31% from the previous month; pig iron 1,886,400 tons, a decrease of 6.16% from the previous month; steel 2.043 million tons, a decrease of 9.57% from the previous month. With the continuous promotion of the steel production restriction policy, the pressure on steel production in the second half of the year tends to increase, and there is still room for production to decline.
The reduction in steel production drove up the price of steel. In July, under the effect of the expected supply shortage caused by the reduction of steel production, the price of steel showed a strong upward trend as a whole. On July 2nd, the Shanghai rebar price index was 4895 yuan/ton. Since then, it has continued to fluctuate upward, reaching its highest point of 5324 yuan/ton on July 26. At present, the overall demand is still weak. In the later period when steel demand rebounds and the supply continues to be tight, the steel market supply and demand may show a tight balance, and steel prices still have room for upwards.
The prices of raw materials have maintained an upward trend as a whole, with differentiation among different categories. The purchase price index in July was 56.3%, an increase of 3.4 percentage points from the previous month, indicating that the prices of raw materials have maintained an overall upward momentum. However, when it comes to the prices of various raw materials, there is a clear differentiation.
Among them, the prices of billet, fine iron powder, and steel scrap all increased to varying degrees, while the prices of coke and iron ore decreased. Among them, the price of iron ore dropped significantly under the situation of increased pressure to reduce production. The 62% iron ore index continued to decline from US$222.3/ton in the middle of the year, and it had fallen below US$200/ton on July 29, which was nearly The two-month low is conducive to steel mills’ cost control.
It is expected that the steel market in August will get rid of the off-season factors, and demand will be gradually released.
First, as the high temperature and rainy weather passes, the impact of floods has subsided, and the inhibitory effect on the demand for steel for construction sites will also diminish.
Second, the real estate industry continues to contribute to the increase in demand. From January to June of 2021, real estate development investment increased by 15.0% year-on-year; it increased by 17.2% over the same period in 2019, and the two-year average growth rate was 8.2%. Investment in the development of the real estate market continued to grow, providing certain support for steel demand.
Third, although the auto industry is still facing the problem of “core shortage”, the sales of various models have rebounded significantly in the first half of the year. Under the current economic environment, auto production and sales will maintain a steady growth trend in the future, which will also support steel demand.
At the same time, the central bank’s RRR cut will promote the gradual release of monetary funds, which will boost the downstream steel industry. This month’s production and operation activity expectation index was 56.0%, an increase of 9.0 percentage points from the previous month. After operating below 50% for two consecutive months, it returned to the expansion range, indicating that companies’ expectations for the market outlook have improved.
Due to the limited production of steel mills, there is still room for production to shrink. Under the guidance of the policy that the annual crude steel output does not exceed last year’s, steel output is expected to still shrink in the second half of the year. Steel production in August is expected to continue the current downward trend. With production slowing down and demand picking up, the market supply-demand relationship will also gradually improve, and the consumption of steel mills and social inventories will be accelerated.
Steel prices are expected to keep rising, and corporate costs tend to fall. Tight supply and rising demand will also strengthen the support for steel prices. At the same time, with continued efforts to curb commodity futures speculation, steel prices are expected to maintain an upward trend in August, but the growth rate is relatively stable, and the probability of sharp rises and sharp falls is unlikely.
The decline in the production of domestic steel mills has led to a decline in iron ore demand, driving iron ore prices to continue to fall, gradually returning to the fundamentals, and corporate costs also tending to fall.
It is worth noting that starting from August 1, my country will abolish export tax rebates for 23 types of steel products and increase export tariffs on ferrochrome and high-purity pig iron. The export policy adjustment will further change the export willingness of steel mills, and steel exports are expected to continue to shrink.
