- Steel prices drop in July amid lower production costs
- Seasonal pressures to ease in August. Mills ops production cuts
- Impact of global inflation, interest rate hikes to sustain
Morning Brief: In July, China’s domestic steel prices continued to trend downward. Prices of iron ore, coke, and ferrous scrap fell, and thus the cost support to steel prices continued to weaken.
Last month, the market was restricted by the off-season lack of demand. Downstream procurement was insufficient, and cost support was lacking.
Prices downtrend
As of end-July, the comprehensive national steel price was RMB 4,324/tonne, down RMB 352/t from the end of last month, a m-o-m drop of 7.5%, and a y-o-y decrease of 26.2%. Prices of long products were at RMB 4,241/t, down RMB 222/t or 5% m-o-m and down 23.5% y-o-y. Flat products price averaged RMB 4,296/t, down RMB 458/t m-o-m or 9.6% and a y-o-y decrease of 30%.
The average price index was RMB 4,308/t, down RMB 442/t m-o-m or a decrease of 9.3%, and a y-o-y decrease of 25.9%.
In end-July, of the eight major steel products monitored in 10 major cities, prices of all dropped significantly m-o-m, among which cold-rolled coils fell the most, by 10.2%. Seamless pipes fell the least — by at 3.4%; other items fell by 5.5-10%.
Output down
Since July, with the further decline in steel prices, profit margins of mills have continued to be compressed, and they face large losses. The operating rate of blast furnaces across the country has shown a continuous downward trend. In July, the average operating rate of blast furnaces was 77.5%, down 4.1 percentage points from the previous month and 2.4 percentage points lower than the same period last year.
Judging from the 10-day production data of key large and medium-sized iron and steel enterprises, output continued to decline. According to data from the China Iron and Steel Association (CISA), the average daily output of crude steel by key enterprises in early and mid-July was 2.06 million tonnes (mnt), down 6.43% m-o-m and 4% y-o-y.
The production cuts helped to alleviate the losses of steel mills by the end of the month and output is expected to resume. The daily output of crude steel in July may drop to about 2.85 mnt against June’s 3.13 mnt.
Inventory declines
In July, due to the significant reduction in steel production and dull demand, social inventory of steel continued to decline, and was lower compared to the same period last year for the first time.
As of end-July, social inventory of steel products in 29 key cities was 12.244 mnt, a m-o-m decrease of 15.5% and a y-o-y decrease of 10%. Building materials inventory was 6.941 mnt, a m-o-m decrease of 21.6% and y-o-y drop of 16.2%. Sheet metal social inventory was at 5.303 mnt, a m-o-m increase of 3.6% and a y-o-y decrease of 0.3%.
China’s economy has fluctuated in the first half of the year, showing a trend of falling from a high to a low point and then stabilizing and rebounding.
August outlook
In August, seasonal constraints will gradually weaken, and the supply and demand balance is expected to improve. However, the domestic steel market will still face the impact of global inflation and interest rate hikes. It is expected that, propped by factors such as lower cost support, the domestic steel market will show a slight rebound in August.
August will see the onset of autumn in China, when the high temperatures and rains start receding. With the government focused on increasing national growth through a push on key projects, infrastructure investment will drive the demand for construction steel which will offer room for improvement.
On the whole, the domestic steel market will still face the impact of global inflation and interest rate hikes. Thus, there will be pressure in terms of supply although seasonal constraints will gradually weaken.
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