In June, the main futures contract for rebar tested the 3,500 CNY/ton level twice but failed to break through, confirming the assessment that steel prices have solidified a bottom but are struggling to rise. It is expected that the central market price in July might decrease slightly compared to June.
At the end of June, Chengjiu sample data indicated that rebar and hot-rolled coil (HRC) would gradually enter an inventory accumulation phase. Chengjiu’s preliminary data suggests that steel supply in July might retreat from high levels, but the reduction will be limited. Under supply pressure, weak seasonal demand and financial constraints suppress the price of finished steel products, leading to further contraction of steel mill profits. If mills fail to reduce production in response to this pressure, there is a risk that steel prices could break downwards in late July.
While the core scenario for the July steel market revolves around shrinking steel mill profits, it is essential to monitor the speed and extent of HRC inventory pressure to prevent a significant drop in steel prices:
Since the Spring Festival of 2024, HRC demand has shown considerable resilience. Despite high supply and inventory levels becoming the norm, HRC has maintained a price premium over rebar and generally remained profitable for production, driven by strong exports and manufacturing. This resilience, however, reflects the vulnerability of its demand: research indicates that some end-demand for HRC may marginally decline in July (with noticeable seasonal weakness in demand from the automotive, home appliance, and export sectors, compounded by limited improvement in infrastructure funding bottlenecks), making the market sentiment sensitive to any marginal weakening of HRC demand.
It is estimated that the average weekly production of HRC in July will be about 3.17 million tons (a decrease of 70,000 tons from the weekly average in June), still at a relatively high level. Recently, increased rainfall has prevented HRC resources en route from entering warehouses, leading to an increase in hidden inventory. As HRC inventory was already at a historical high for the same period, this hidden inventory may quickly rise, potentially triggering a sharp decline in steel prices if it exceeds expectations.
Overall, the pressure on steel demand in July comes from:
Underwhelming Local Debt Issuance and Special Bond Funding Issues:
According to the work report released by the National Audit Office on June 25, there are significant issues with local government debt, including idle and misappropriated special bond funds and unreasonable project arrangements. This may lead to a mismatch between project resources and funding in some areas. The latest survey by Century Construction Network also shows a continuous decline in funding availability for construction sites since the second half of June, with many projects repaying old debts with new ones. The funding issue is expected to continue dragging down steel demand in the short term. Based on the progress of special bond issuance, the issuance progress of new special bonds in the first half of the year was less than 40%, significantly lower than the 61% progress in the same period last year. Furthermore, special bonds only serve as a bottom-line measure for infrastructure, with local fiscal spending still in a “contraction and repair” phase in the short term, making it difficult to counteract the weakness in infrastructure with special bonds.
Real Estate Policy Support Intentions Are Clear, But the Sector Remains Sluggish: Last week, Beijing followed up with the “5.17” new real estate policy, but it only slightly boosted the second-hand housing market in first-tier cities, with no improvement in the overall new housing market. The transmission path of “reducing inventory of existing homes—increasing new housing starts—increasing steel demand” is still not smooth.
Significant Weakening in Manufacturing Steel Demand: Historical data shows that major end-users of HRC, such as the automotive and home appliance sectors, exhibit significant seasonal weakening in steel demand during the summer:
- July Automotive Production May Marginally Decline: According to the Central Meteorological Observatory, after July 15, cities like Hubei, Chengdu, and Shanghai, where many car factories are concentrated, will face high temperatures of around 35°C, leading to the traditional “summer break” for auto plants. According to historical data from the China Association of Automobile Manufacturers, July auto production has consistently decreased month-on-month compared to June, with an average decline of 8% since 2000.
- July Home Appliance Production Will Significantly Decline: According to industry online data, the planned production volume for the three major white goods in July will decline by 15% month-on-month, the largest decline for the same period since 2006.
In July, the steel market enters a traditional off-season, and Chengjiu’s preliminary data shows that pig iron production peaked at the end of June but will decline slowly in the short term: the daily pig iron production at the end of June was 2.39 million tons/day, and the lowest daily pig iron production in July may only decrease to 2.35 million tons/day. It is expected that weekly rebar production (Chengjiu sample) will drop slightly from 2.46 million tons in the first week of July to 2.35 million tons, and HRC weekly production will gradually decline from the current 3.22 million tons to 3.15 million tons, with the decline being slow and maintaining high production levels.
Rebar: Demand Declines Faster Than Supply
Due to the underwhelming realization of macroeconomic benefits released in May, the market sentiment towards rebar demand in the off-season is pessimistic. Rebar spot prices continued to decline in June, with an average decrease of 110 CNY/ton compared to May, reaching 3,564 CNY/ton. It is expected that rebar demand will decline faster than supply in July, accelerating the accumulation of total inventory.
Last week, the small sample rebar production increased significantly by 142,000 tons to 2.447 million tons, reaching a new high for the year. According to Chengjiu’s research, some steel mills in North and Northwest China are still resuming production this week, and rebar production is expected to continue to increase slightly by 13,000 tons to 2.46 million tons in early July. However, the steel industry chain will maintain the trend of compressing steel mill profits in July, and inventory pressure at the mills will gradually accumulate. It is expected that rebar production will start to decline slowly in mid-July, as the current extent of steel mill losses (127 CNY/ton for rebar) and inventory pressure have not yet reached the level requiring significant production cuts. Rebar production is expected to gradually decline to an average weekly level of 2.35 million tons, 110,000 tons lower than the peak in July, but still at a relatively high level for the year.
It is expected that rebar demand will continue to decline in July, possibly reaching a new low for the off-season:
- The real estate sector has not yet bottomed out (according to the National Bureau of Statistics: real estate development investment fell by 10.1% year-on-year in May, and housing construction area decreased by 11.6% year-on-year).
- The planned issuance of special bonds in July is lower than in June (according to statistics as of June 28, 27 provinces and cities across the country plan to issue 279.1 billion CNY of new special bonds in July, lower than the actual issuance of 332.7 billion CNY in June). Furthermore, based on the pattern of special bond issuance this year, the issuance amount and scale in the first month of each quarter are lower than in the subsequent two months, so the funding situation in July is not optimistic.
- The North is facing a high-temperature crisis, while the South has officially entered the rainy season, with some regions (East China) already experiencing flooding, continuously obstructing downstream construction progress (this week, the apparent demand for rebar in East China decreased significantly by 135,000 tons week-on-week). Therefore, the seasonal decline in rebar demand in July is difficult to reverse: it is expected that the apparent demand for rebar will decrease by another step compared to June, dropping by 70,000 tons to 2.25 million tons/week.
Overall, due to the relatively high level of rebar production in July, pressure remains unabated, and the seasonal weakening of demand will accelerate inventory accumulation. However, according to the balance sheet, the rate of inventory accumulation is not significantly different from the past three years: it is expected that the average price of Shanghai rebar in July will decline slightly.
HRC: Market Under Pressure
In June, the average price of HRC in Shanghai fell by 77 CNY/ton month-on-month to 3,773 CNY/ton due to the dissipating market expectations of macroeconomic benefits, reaching the lowest monthly average price for the year.
Historical data indicates that HRC demand may significantly weaken in July. According to the balance sheet, the small sample HRC apparent demand is expected to decrease by 130,000 tons week-on-week to 3.12 million tons/week (the monthly average apparent demand for HRC in March was 3.14 million tons), mainly due to the accelerated decline in manufacturing demand in July compared to previous years.
- Home Appliance Demand May Decline More Than in Previous Years: According to the production plan for the three major white goods, the total production of air conditioners, refrigerators, and washing machines is expected to decrease by 15% month-on-month in July, significantly faster than the decline in actual production in the same period last year (the actual production of the three major white goods in July 2023 decreased by 4% month-on-month).
- July Is Traditionally a Low Production Season for Automobiles: According to the Central Meteorological Observatory, after July 15, cities like Hubei, Chengdu, and Shanghai, where many auto factories (such as Geely and Changan) are concentrated, will face high temperatures of around 35°C, leading to the traditional “summer break” for auto plants. According to historical data from the China Association of Automobile Manufacturers, auto production in July usually decreases month-on-month compared to June. Even in July 2022, after a series of automobile consumption stimulus policies were implemented in late May, auto production still fell by 1.8% month-on-month.
In addition to the marginal weakening of some domestic end-user HRC demand, the price advantage of HRC exports has improved again (since early June, the premium for domestic HRC over Southeast Asia has expanded by nearly 35 USD/ton), but steel exports in July may face a seasonal low, making it difficult to maintain strong performance.
The monthly supply of HRC in July is expected to decline month-on-month: according to Chengjiu’s preliminary data, some steel mills in North China will begin maintenance from late June, resuming production only in late July. Therefore, it is estimated that the average weekly supply of HRC for 37 small sample mills will decrease by 70,000 tons to 3.17 million tons, still at a historically high production level.
HRC inventory remains at a historical high for the same period, and it is essential to note the recent weather-induced increase in hidden inventory due to delayed entry into warehouses, which may trigger market overcorrection risks if inventory data turns unfavorable. It is expected that under the base scenario, the average price of Shanghai HRC in July will decline month-on-month, with the rebar-HRC price spread falling below 200 CNY/ton.
Iron Ore: Prices Under Pressure
In June, the average price of PB powder at Qingdao Port was 817 CNY/ton, down 61 CNY/ton from May, reaching the lowest monthly average price of 2024. However, the lowest daily price of iron ore in May was 794 CNY/ton, still higher than the annual low of 757 CNY/ton. Due to weakening prices of international commodities and domestic rebar demand, the steel market trend is bearish. However, with steel mill production at the highest level for the year, the overall destocking of iron ore in June was only 300,000 tons, far below expectations. Combined with the expected steel production cuts, this led to the largest price drop among black commodities.
Looking ahead to July, seasonal weakening of steel demand and the gradual advancement of steel production control policies will continue to pressure iron ore prices. However, according to Chengjiu’s July steel mill production plan survey, the national average daily pig iron output is expected to be around 2.37 million tons, a slight decrease of 18,000 tons compared to June. Therefore, before a significant decline in pig iron production is expected, the market may see bottom-fishing activities based on valuation, slowing the price decline compared to June.
Coke and Coking Coal: Supply and Demand Dynamics
In June, the average price of grade 1 coke at ports was 1,958 CNY/ton, down 42 CNY/ton from May; the average price of low-sulfur primary coking coal in Linfen was 1,928 CNY/ton, down 80 CNY/ton from May.
After a round of price increases at the end of June, coke enterprises saw slight profitability (model calculations estimate immediate profitability of 10-30 CNY/ton for coke enterprises in major production areas), maintaining high production levels. However, with pig iron production peaking at the end of June and expected to gradually decrease in July, coke demand will follow a marginal downward trend. It is estimated that total coke inventory accumulation will increase in July, putting downward pressure on prices. However, given the slow decline in pig iron production and the low coke inventories at some steel mills, short-term coke prices will still have some support from rigid demand, continuing to squeeze steel mill profits.
As the “Safe Production Month” comes to an end, the pace of mine resumption accelerated in the last week of June, with the mine operating rate reaching a yearly high (91.1%). It is expected that the resumption of mines will stabilize in July, and coking coal production will continue to rise, accelerating coking coal inventory accumulation. Since June, stable domestic production, coupled with significant import growth, has already started coking coal inventory accumulation despite high production levels of coke and pig iron. If demand declines month-on-month in July, the supply-demand gap will widen further, putting more downward pressure on coking coal prices.
Note: The prices marked with an asterisk (*) in the text represent the following specifications (all prices are inclusive of tax except for scrap steel):
- Rebar: Shanghai Rebar HRB400E20mm
- HRC: Shanghai Q235B: 4.751500C
- Iron Ore: Qingdao Port PB Powder (wet ton price, inclusive of tax)
- Scrap Steel: Zhangjiagang Heavy Scrap (thickness ≥ 6mm)
- Coke: Rizhao Port Grade 1 out-of-warehouse
- Coking Coal: Linfen Low-Sulfur Primary