Supply Side Analysis
High Production with Limited Maintenance and New Capacity Adding Pressure: For July and August, hot rolled coil (HRC) production is expected to remain stable compared to June, maintaining high supply levels due to two main factors:
- Profit Margins:Profit margins still exist for coil production, making it economically viable.
- Structural Preference:Long products consumption is unlikely to rebound in the short term, and funding is hard to secure, leading to a preference for flat products.
The recently commissioned production lines are also adding to the market supply, with supply increments surpassing reductions. This imbalance makes it difficult to reduce overall supply levels.
Domestic Pressure and Export Trends: Steel mills are lowering August ex-works prices, reflecting substantial pressure on domestic orders and increasing export expectations. State-owned enterprises (SOEs) are ramping up exports to alleviate domestic order pressure, ensuring competitiveness in the market. North China mills are maintaining low prices to secure orders, with a daily clearance structure keeping current orders at a five-day level. In a scenario of stagnant consumption growth, price increases are challenging, indicating continued upstream pressure without signs of easing.
Demand Side Analysis
Seasonal Weakness in Demand: Demand remains weak for July and August, typical of the off-season. According to Chengjiu, steel mills are barely meeting hot coil order volumes, while cold coil orders are significantly lacking. This discrepancy has led to increased expectations for cold rolling maintenance in July. Key factors influencing this imbalance include:
- Automobile and Home Appliance Industries:Seasonal breaks, anti-dumping measures, and declining domestic consumption orders have weakened demand.
- Cold Coil Overproduction:High production levels have led to significant inventory accumulation, curbing hot coil consumption.
Manufacturing Sector Impact: While there is some stability in shipbuilding and container manufacturing driven by overseas demand, other areas of the manufacturing sector are experiencing weakened consumption. The outlook for domestic consumption remains poor without supportive policies, making a significant rebound unlikely.
Market Sentiment and Price Outlook
Persistent High Inventory Levels: With inventories continuing to rise since July, the off-season effect has reduced downstream consumption, especially in the automotive, home appliance, and door manufacturing sectors. Despite slightly better galvanized sheet exports, domestic demand remains weak. This situation has led to a notable increase in cold rolling maintenance compared to June.
Export Dynamics: June saw a decline in export volumes compared to May. Chengjiu’s research indicates that July-August order volumes have decreased, primarily affecting private enterprises. SOEs and large private enterprises continue to perform well in exports, reflecting a move towards regularization. Although the overall volume may decrease, unit prices are expected to rise, putting additional pressure on domestic consumption.
Profitability and Risk Factors: Steel mills continue to face pressure due to profitability and bank loan risks. Despite losses, mills are reluctant to reduce production significantly, preferring to squeeze profit margins further. Thus, hot metal flows are likely to continue favoring flat products, limiting the potential for resolving supply-demand imbalances and increasing risk expectations.
Summary
Hot Rolled Coil Supply and Demand Outlook for July-August:
Supply: High production levels with limited maintenance, new capacity adding supply pressure.
Demand: Weak seasonal demand, significant inventory accumulation, weak domestic consumption.
Market Sentiment: Low confidence, cautious trading, weak downstream orders.
Price Outlook: Continued volatile or weak trends, limited room for price increases.