Analysis of Chinese steel prices in March

Forecast in March steel prices to maintain the range of shock pattern, it is difficult to have a significant drop in space.

We believe that the downward adjustment of steel price in late February and early March released the downward pressure of March price in advance. Thanks to the improvement of demand side in March, the peak of supply side and the toughness of raw material price, steel price may fall first and then rise.

After the Chinese New Year, market expectations continue to test the degree of demand recovery, and the market fluctuates, resulting in steel prices to maintain the characteristics of price volatility.

Sentiment fell again last week as growth in molten iron production accelerated and steel demand improved only modestly. At the same time, the market on the middle and late March steel price expectations began to become pessimistic, worried about the positive macro expectations of further release space limited, the supply side of the continued release of output and infrastructure demand for steel peak and other adverse factors superposition, steel prices have fallen, even stampede risk.

We don't think we should worry too much about the falling risk of steel prices, mainly based on the following four reasons:

1. The Two sessions may continue to release substantive favorable policies. The Chinese economy has confirmed the trend of recovery since the beginning of the year, but it is characterized by uneven cooling and heat and unstable momentum. In particular, the core indicators of the real estate industry are still cold under the stimulus of policy easing, and the speed of recovery is still full of uncertainties. Therefore, substantial favorable policies, including fiscal and monetary policies, are likely to be further eased to consolidate the momentum of economic development.

Steel mills produced 2.341m tonnes of molten iron last week, up 32,900 tonnes in weekly terms, the fastest weekly growth since the Lunar New Year. However, according to the survey, the average daily output of molten iron reached 2.36 million tons, the growth rate will be greatly slowed down, steel mills in thin profit is difficult to form mass production, may not form a threat to the supply end. At the same time, the rapid rise in ore prices has also formed a potential policy and market constraints on output.

In the past two weeks, we analyzed the "wave effect" of construction on steel demand, and predicted that there is still room for improvement in steel demand in March. Take rebar for example, it is estimated that the weekly average thread demand in March is 3.2 million tons/week, but the trend change of the thread demand is more important: if the thread demand increases from 3.2 million tons/week to 3.5 million tons/week driven by downstream replenishment in mid-late March, then the rising trend of steel price is confirmed. But if the front is high and the back is low, there is the possibility of a callback to the cost line. 

2. Thread: The upstream and downstream fully resumed work in February. As of last week, the cumulative thread production in February was 790,000 tons lower than that of last year, while the cumulative demand was 2.6% higher.

However, the transaction of building materials failed to maintain a high level after breaking 200,000 tons/day. Last Thursday and Friday, the transaction of building materials fell to 140,000 tons/day, and the market began to worry about the sustainability of demand. At the same time, the production increase of steel mills was faster than expected: the average daily molten iron of Mysteel247 steel mills increased to 2.34 million tons/day, which was 15 and 40 million tons/day higher than the previous month, respectively, and the risk at the supply end of thread intensified. 

3. Hot coil: With the continuous resumption of downstream hot coil in February, weekly demand continued to improve month-on-month; Superimposed steel raw material replenishment, with the rise of raw material prices, steel mill profit maintained at the edge of profit and loss, resulting in limited hot coil supply increment: hot coil price shock is strong operation.

Due to the sudden issue of export qualification examination, some steel mills have suspended accepting export orders, and some exports will be converted to domestic trade to increase market supply. With the slow recovery of domestic demand and less maintenance of steel mills in March, hot coil supply is expected to rise in March compared with February, and the weekly average output may reach about 3.15 million tons /. But the hot roll production cost support is strong in March, superposition of the positive expectations of the two sessions, the hot roll price is difficult to have deep drop space. Supply will recover faster than demand, limiting the upside.