Overview: After experiencing an oversold month and a half after the New Year, the market rebounded in April. Macroeconomic policies were frequently issued in May and steel prices continued to fluctuate upward, but the actual market demand was weak. After the market gradually entered the off-season, the game between expectations and reality intensified. Can steel prices continue to rise?

1. Short-term price support is strong

1. Inventory continues to be liquidated

As steel mills' profits expanded and blast furnaces resumed production, steel inventories have fallen for eleven consecutive weeks. The continuous reduction of inventories is one of the important factors supporting steel prices. According to Mysteel's research, the output of the five major varieties last week was 8.9601 million tons, a weekly increase of 0.7%, while the total consumption of the five major varieties was 9.5019 million tons. Although it has declined month-on-month, the overall inventory is still in a trend of reduction.

2. Costs are still supported

Cost support is another important factor in the firmness of steel prices. Against the backdrop of rising molten iron production , rising raw material prices have pushed up the cost center. Last week, molten iron production fell, but according to Mysteel's research, 15 blast furnaces are scheduled to resume production in June, involving a production capacity of about 58,600 tons/day; 8 blast furnaces are scheduled for maintenance, involving a production capacity of about 35,900 tons/day. If the production is carried out according to the current statistics of the suspension and resumption of production plan, the average daily molten iron production in June is expected to be 2.378 million tons/day, which is still slightly higher than the molten iron production level in May. Against this background, short-term raw material prices still have some support.

2. The characteristics of off-season and peak season are weakening

The main contradiction in the current market situation lies in the imbalance between supply and demand caused by weak demand, and the root cause of weak demand lies in the funding problem in the downstream. The slow turnover of downstream funds, the extended project duration, and the delayed release of demand have led to a significant weakening of the market's peak and off-season characteristics. In recent years, the steel market has shown the characteristics of "not so busy in the peak season and not so quiet in the off-season". This year's "Golden March" was completely empty, and the "Silver April" did not see a scene of rising volume and price. According to various data in May, demand is almost the same as in April.

First of all, let's look at the demand for rebar . From mid-March to the end of May, the consumption of rebar basically remained at around 2.8 million tons. Although it still dropped significantly compared with the same period last year, demand has remained relatively resilient on a month-on-month basis recently.

Secondly, according to Mysteel's research, the overall order volume of the downstream manufacturing industry is still acceptable, large steel structure enterprises have performed well in receiving orders, and the daily consumption of raw materials has increased by 3.64% month-on-month. The fundamentals of the industry are still supported; the demand in the construction machinery industry has increased, and the inventory of raw materials has increased by 6.20%. The overall inventory digestion speed has gradually accelerated; the old-for-new activities in the home appliance retail market remain active, the inventory on the raw material side has increased by 3.48% month-on-month, and the daily consumption of raw materials in the market has increased by 9.46% month-on-month.

As relevant departments have completed the screening of local government special bond projects for 2024, the issuance of new special bonds in various places has accelerated significantly since May. The issuance of new special bonds from the beginning of the year to date has exceeded one trillion yuan, but the issuance rate is still significantly slower than last year. It is expected that the issuance of special bonds will continue to accelerate in June. From the perspective of investment areas, municipal and industrial park infrastructure, transportation infrastructure, and people's livelihood services are key directions.

3. Policy expectations lead the market

The rise in May was more influenced by favorable policies. The 5.17 new policy clearly abolished the lower limit of the national mortgage interest rate policy, lowered the down payment ratio of mortgages and the interest rate of provident fund loans, and planned to establish affordable housing refinancing and purchase existing houses as affordable housing. For the long-term sluggish real estate sector, this policy has significantly boosted market confidence, especially for the bottom line of existing houses, indicating that there is still room for the release of steel demand in the real estate industry in the future. Recently, first-tier cities have continued to follow up and implement the "5.17" new policy. There is still room for imagination in the future policy, and the bottoming out and recovery of the real estate industry is still worth looking forward to.

In addition, there are expectations of interest rate cuts both at home and abroad. Although the Fed's interest rate cut expectations have been delayed, the overall direction remains unchanged. The accelerated issuance of local bonds and the intensive release of real estate policies mentioned above will also promote the arrival of domestic interest rate cuts.

Finally, regarding industrial policy, crude steel production will continue to be regulated in 2024, which is undoubtedly a major positive for the industry. In the short term, market sentiment will strengthen and the market will continue to revolve around the policy. However, in the long term, it will take time for the policy to be implemented. In addition, the current supply pressure in the steel market is not great, so the actual impact of production regulation on the market remains to be verified.

4. Conclusion

Against the background of continuous inventory reduction, the contradictions in steel fundamentals are not prominent, and the characteristics of peak and off-seasons are obviously weakened. Demand will not shrink significantly after entering the off-season. In the short term, the current market is dominated by macro expectations, and favorable policies have been frequently introduced recently. Driven by expectations, steel prices are easy to rise but difficult to fall. As emotions are gradually digested, the market will return to fundamentals, and the steel market may enter a stage of volatile adjustments.

The above content is excerpted from https://gc.mysteel.com/a/24051411/19A3371CC08038CF.html