Supply Contraction And Demand Weak, Steel Price Trend Will Continue To Run Strong

While reducing crude steel output, power curtailment has become a new hot spot in September. After the long holiday of "October", terminal demand ushered in an important time period in the second half of the year. Where is the steel price heading in the context of certain supply contraction and weak demand expectations?

Strict restrictions on production and electricity, and the tone of reducing crude steel output remains unchanged

Due to the shortage of coal supply, power shortages have resulted in the implementation of industrial power cuts in many places, and restrictions on civilian power consumption have occurred in some areas. On the one hand, production restrictions and power restrictions are strict, and the output of rebar has fallen sharply, and the productivity of electric arc furnaces will be affected first. As of the week of September 30, the production of rebar was 2,482,700 tons, which was not only a four-week decline from week to week, but also the data was lower than the level of the same period in the past five years, which was the lowest value since the beginning of this year. Limited production and power cuts once provided strong support for steel prices in September. On the other hand, disorderly production and power restrictions are interfering with normal production and operation and residents' lives. On October 9th, Premier Li Keqiang of the State Council emphasized at a meeting of the National Energy Commission that we must proceed from reality to correct some localities with "one size fits all" power cuts, production restrictions, or "sports-style" carbon reductions, and insist on a national game of chess and not run away. After the National Day, production was resumed in some areas where production was stopped before the deadline. Among the 21 short-process enterprises in Guangdong Province, 14 companies have clearly relaxed the curtailment, accounting for 66%; blast furnaces in Jiangsu Province have resumed concentrated production but unsaturated production, and electric furnaces have staggered production at night. ; Guangxi Zhuang Autonomous Region is gradually resuming production but unsaturated production, and electric furnaces produce staggered production at night. With the relaxation of production restrictions and short-term supply expectations increased, rebar prices fell sharply on the two trading days of October 12th and 13th.

The author believes that when the short-term supply margin changes, market expectations will change and prices will quickly pull back. However, from the mid-term trend, the logic of reducing crude steel output has not changed. Data from the National Bureau of Statistics show that in September 2021, China's crude steel output was 73.75 million tons, a year-on-year decrease of 21.2%. The cumulative output from January to September was 806 million tons, a year-on-year increase of 2.0%. This is the fourth consecutive month that China's crude steel production has fallen, a drop of 27.1% from the annual peak of 99.45 million tons in May. The average daily output of crude steel in September was 2.458 million tons, a month-on-month decrease of 8.5%, setting a new low since April 2020. The above data all show that crude steel output is showing a sharp downward trend. Judging from the current high-level statements and actual production conditions, there is a high probability that the crude steel reduction target will be achieved throughout the year. On October 13, the Ministry of Industry and Information Technology and the Ministry of Ecology and Environment issued the "Regarding the Development of Beijing-Tianjin-Hebei and Surrounding Areas 2021-2022 "Notice on Staggered Production in the Iron and Steel Industry in the Heating Season of the Year" further confirms the feasibility of the plan. The first stage of the document is to ensure the completion of the target task of reducing crude steel output in the region from November 15 to December 31, 2021. It can be seen The management's determination to achieve the goal throughout the year.

From a longer-term perspective, the main line of the annual crude steel production leveling or reduction has not changed, and the critical period for completing the task with a high probability is in October and November, so the steel price trend will remain strong.

"Golden Nine Silver Ten" in doubt, terminal needs to be tested

Since the beginning of this year, the domestic macro-economy has shown a cooling trend. Whether it is investment in fixed assets or a number of real estate-related data, the year-to-date has been opening up and down, and going down month by month. Since the "housing to live without speculation" set the tone, the housing market has returned to rationality, and the three red lines have also defined the boundaries of disorderly expansion of real estate companies. When housing prices in some areas (especially second- and third-tier cities) loosen or start to fall, consumers' psychology of buying up and not buying down leads to postponement of purchase behavior, which puts greater pressure on the traditional peak season of "Golden, Nine, Silver, and Ten". In fact, pessimistic expectations have already had an impact on the upward trend of steel prices in September.

As of October 13, the average trading volume of rebar from 237 distributors in the past five days was 186,800 tons, a decrease of 26% from the same period last year. The national construction steel transaction volume has been lower than that of the same period last year since May. If the summer rainfall this year is too heavy, and the resumption of production and work in the same period last year, the transaction is weak. The start of the peak season in September did not boost the spot market transaction volume to the same period last year. . This shows that despite the high steel prices, traders remain cautious about the market outlook and lack sufficient confidence. *The fundamental reason is still the tepid end market led by real estate. As of the week of October 14, the apparent demand for rebar was 3,237,200 tons, which was basically restored to the state before the National Day, which was lower than the level of the same period last year. Follow-up needs to further track the terminal demand, the market is currently weak in its expectations.

The high inventory level will not hinder the trend of steel prices

As of the week of October 14th, the total rebar inventory was 8,503,600 tons, a decrease of 471,700 tons from the previous month and a decrease of 2,656,100 tons from the same period last year. Except for the stockpiling in the first week of October due to holidays, the total rebar inventory has fallen for 9 consecutive weeks, with a cumulative decrease of 3.0229 million tons. This year's inventory level is lower than 2020, but significantly higher than 2019 and before. Nevertheless, the author believes that high inventory will not bring substantial pressure on prices. First, the current inventory is only higher than 1.73 million tons in the same period in 2019. With subsequent digestion, the inventory* is expected to be the same as in previous years. Second, in the case of tight supply, the market pays more attention to changes in output, as long as the inventory level is not If it is too high, it will not have an impact on short-term supply; third, since last year's large-scale inventory did not have a major impact on steel prices, the market's expectation that inventory will affect prices has decreased. Therefore, this year's steel inventory will not hinder subsequent price trends.

In summary, the goal of reducing crude steel production remains unchanged, and the trend of steel prices during the year will remain strong. The “cooling” of the real estate market has made demand suspicious and suppressed the upward space of steel prices to a certain extent; High inventory levels will not have a substantial impact on prices. Therefore, the steel price trend may be stronger in the current region.