Analysis of steel price trends in the second quarter: Is there still an opportunity in the market?

The operation of the steel market remained basically stable in the first quarter

The trend of spot and futures prices of steel is basically consistent. From the perspective of futures, futures steel entered an upward trend after bottoming out in mid November last year, and remained in a slight fluctuation and stable upward trend in the first quarter. After entering the second quarter, steel prices continued their mild upward trend in the first quarter. Currently, in the absence of major news and with the current supply-demand situation maintained, steel prices will continue to fluctuate upwards within the channel until the end of April. So what will be the trend of steel prices in April and May?

The national epidemic has had varying degrees of impact on the supply side, demand side, logistics and warehousing aspects of the steel market.

On the one hand, epidemic prevention and control have led to upstream price hikes. Since March 2022, the epidemic prevention and control measures in many regions across the country, including Hebei, Northeast China, Shanghai, etc., have been continuously strengthened, which has had a significant impact on the upstream and downstream of steel. The temporary lockdown management in Tangshan, Handan, and other areas of Hebei Province has been fluctuating, resulting in difficulties in entering steel raw materials and shipping finished products. The flow of resources has been hindered, leading to some production being suppressed. Steel mills have taken measures such as soaking furnaces, increasing maintenance, and proactively reducing production, which has led to a certain reduction in market steel supply and increased steel prices;

At the same time, the epidemic has also led to an increase in logistics and warehousing costs for steel trading, which has also made merchants hesitant to sell and continuously pushed up steel prices.

On the other hand, what is even more serious is that the epidemic has led to many downstream shutdowns and production stoppages, almost stagnant demand, and a lack of market for steel, resulting in a significant negative impact on the price of steel.

Macroscopically, measures to stabilize the economy, such as infrastructure pre construction, central bank reserve requirement reduction, and tax retention and refund, continue to enhance steel demand expectations.

On April 25th, the People's Bank of China lowered the reserve requirement ratio for financial institutions by 0.25 percentage points, releasing approximately 530 billion yuan in funds. This helps to maintain reasonable and sufficient liquidity, promoting the reduction of comprehensive financing costs.

Starting from April 1st, China's large-scale tax refund policy for retained tax credits has been officially implemented. As of April 15th, a total of 420.2 billion yuan in retained tax refunds has been deposited into the accounts of 527000 taxpayers.

Monetary policy stimulates the financing needs of market entities, requiring active fiscal policy efforts to reserve high-quality projects and increase project capital. Monetary policy and fiscal policy are closely coordinated and work together. Data shows that the total amount of 3.65 trillion yuan in newly added local government special bonds for project construction has been fully issued this year, which will drive more social investment to invest in infrastructure construction and play a key role in stabilizing the economy and employment.

The recent frequent outbreaks of domestic epidemics have further increased the downward pressure on the economy, and the difficulties faced by market entities have increased. By strengthening the coordination between monetary and fiscal policies, relevant departments of the country have played a "combination punch" to help enterprises alleviate difficulties in protecting market entities, thereby stabilizing the macroeconomic situation, boosting steel demand expectations, and boosting steel prices.

From a supply perspective, it is difficult for the total inventory of crude steel to accumulate significantly throughout the year, and the overall supply side is tightening.

According to data from the National Bureau of Statistics, China's crude steel production decreased by 6.4% year-on-year in March, and by 10.5% year-on-year in the first quarter. The steel production was 31.193 million tons, a year-on-year decrease of 5.9%, and the overall steel supply was tightened compared to last year. The latest data from the National Bureau of Statistics shows that in March 2022, China's steel bar production was 20.399 million tons, a year-on-year decrease of 11.9%; The cumulative production from January to March was 55.289 million tons, a year-on-year decrease of 13.3%. At the same time, on April 19th, the National Development and Reform Commission stated that to ensure a year-on-year decrease in crude steel production this year, key areas such as Beijing, Tianjin, and Hebei will focus on reducing production. Therefore, from the perspective of steel mills, it is expected that the overall supply side of the steel market will operate weakly.

Let's take a look at the inventory data (PPT) again. In terms of inventory, it will enter the traditional peak season after the year. The so-called "golden three silver four" period was originally a period of rapid decline in inventory in March and April. However, this year, due to the strong downward pressure of the economy and the repeated impact of the epidemic, downstream demand has continued to weaken, and inventory as a whole has shown a fluctuating upward trend. Although there was a significant decline in early March, the good times did not last long. Affected by the epidemic, inventory levels rose again.

So, will inventory levels accumulate significantly? Let's make a simple calculation. Firstly, according to policy requirements, crude steel production will continue to be reduced this year. If the annual reduction target for this year remains the same as last year, still around 30 million tons, which is equivalent to a production target of 1 billion tons for the whole year. According to the latest data from the Bureau of Statistics, the national crude steel production in the first quarter was 24000 tons, so the reduction target task for the first quarter has been basically completed. Based on this calculation, the total amount of crude steel in the next three quarters is about 760 million tons, with an average quarterly production of around 250 million tons, basically maintaining the overall production level in the first quarter. Therefore, overall, it is difficult for the total inventory of crude steel to accumulate significantly throughout the year, and the supply side is tightening as a whole. In fact, reducing crude steel production is to fully leverage the role of the government and the market, adjust the intensity of steel production in a timely manner, establish a new balance between market supply and demand, and avoid too drastic fluctuations in the commodity market. The core principle is still stability, ensuring stable progress in the overall economy.

From the perspective of demand, the current national policy of stabilizing growth is constantly increasing, and both the resumption of work and the guarantee of project funds have formed strong expectations for the market.

Real estate development investment nationwide increased by 0.7% year-on-year; In the first quarter, the construction area of real estate development enterprises increased by 1.0% year-on-year, indicating the initial warmth in the real estate market; Infrastructure investment increased by 8.5% year-on-year, while manufacturing investment increased by 15.6%. It can be seen that despite the heavy pressure in the first quarter, the investment data in the important steel sector in the first quarter was good. However, due to the fluctuation of the epidemic, the project progress has been greatly affected, resulting in short-term market transactions falling short of expectations. However, as the epidemic control effect becomes apparent, downstream demand will gradually return. According to the data of the first quarter, China's fixed assets investment in highway and waterway transportation is nearly 512 billion yuan, and the Ministry of Finance also said that all the special bond quotas for project construction have been released this year. The transformation from investment to steel demand requires a certain period, and the second quarter is expected to usher in preliminary implementation. Meanwhile, in recent times, banks in more than 100 cities across the country have independently lowered mortgage interest rates. Since March, the average rate has ranged from 20 to 60 basis points, which will accelerate the speed of real estate market repayment and promote the real estate market to stop falling and stabilize as soon as possible. Therefore, based on the current market performance and national policies, the backlog of demand is expected to be concentrated and released in May. Both supply and demand have risen, and demand is likely to surpass supply. The intensification of supply-demand contradictions has accelerated the rise of steel prices to some extent.

The prices of raw materials remain high, with strong support for steel costs.

In early April, the Price Department of the National Development and Reform Commission held a special meeting to study and clarify the criteria for identifying illegal behavior of raising prices in the coal industry. On April 19th, the National Development and Reform Commission announced that it will make every effort to ensure the supply and price stability of bulk commodities, increase market supervision, and crack down on illegal and irregular behaviors such as hoarding and price gouging. After a wide range of fluctuations, the price of black futures plummeted sharply in the end of the trading day, causing a sharp decline.

On the 21st, the Emergency Department of Shanxi Province issued a notice on conducting a major inspection of safety production in coking enterprises, deciding to carry out special inspections and rectification of coking enterprise coke oven gas purification and deep processing safety for all coking production enterprises that have obtained hazardous chemical safety production licenses from April to October 2022. Meanwhile, Vale's iron ore production in the first quarter sharply decreased by nearly 22.5% quarter on quarter. From this data, it can be seen that the tightening of the raw material supply side has led to a brief pullback in the futures market for iron ore and coke, which then bottomed out and rebounded. And currently, the demand for steel mills is recovering, and the replenishment efforts are increasing. However, due to the repeated impact of the international situation and the epidemic, raw material production areas such as Tangshan Qian'an are being sealed off, and raw material resources are tight. Domestic coke is expected to start a sixth round of price hikes, while iron ore import prices continue to rise. Cost support is strong, and steel companies have narrower profit margins. Factory prices remain high, providing strong support for steel prices.

Overall, with the relaxation of epidemic control measures and the current strong expectations and cost support, it is expected that steel prices will continue the current mild upward trend from the end of April to early May, with an increase of about 200 yuan/ton. In mid May, the epidemic control measures are expected to be fully lifted, and at that time, downstream demand is expected to experience a major outbreak. In the overall tightening environment of crude steel supply throughout the year, the supply-demand contradiction will become more tense, with supply weaker than demand, and steel prices accelerating, with a magnitude of about 300-400 yuan/ton.

Entering June, a large area of the country is experiencing high temperatures and rainy seasons, limited construction, and entering a seasonal off-season. Demand is weakening, and steel prices are gradually falling, with a magnitude of about 500-800 yuan/ton.


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