The ferrous complex flamed out on August 1, 2022:
For damn good reason. Check out the latest Chinese steel PMI:
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Judging from the steel industry PMI surveyed and released by the China Federation of Steel and Logistics Professional Committee, July 2022 is 33.0%, down 3.2 percentage points from the previous month, and the operation of the steel industry continues to be sluggish. Judging from the changes in sub-indexes, the characteristics of the market in the off-season appear, the market demand is operating at a low level, the production of steel mills has declined, and the prices of steel and raw materials have continued to decline. It is expected that in August, the market demand will pick up, and the production of steel mills will tend to resume, driving the prices of steel and raw materials to rebound slightly.
Figure 1 Changes in PMI of the steel industry since 2019
In July , the domestic steel market demand was operating at a low level, and the recovery was relatively slow. A number of reasons have led to insufficient market demand. First, the continuous high temperature and rainy weather has led to the steel market entering a short-term seasonal off-season. Second, the investment in real estate, which mainly uses steel, is not optimistic, and the support for steel demand continues to weaken. From January to June, real estate development investment fell by 5.4% year-on-year, and the area of new housing construction fell by 34.4%. The real estate development prosperity index in June was 95.40 , already below the theoretical critical point. The current decline of the domestic real estate industry is difficult to change in the short term, and it continues to decline under the influence of supply and loan cuts in some regions. Third, the international situation has become more severe and complex, the downward pressure on major economies has increased, and external demand has shrunk. Taken together, the demand for steel continued to shrink in July, and the new order index was 25.9%, the same as the previous month and below 30% for two consecutive months. The new export orders index was 39.4%, down 7.7 percentage points from the previous month. The steel terminal market is slow to start, and the market confidence is significantly insufficient. Judging from the monitored terminal wire and screw procurement data in Shanghai, the recovery of Shanghai terminal procurement in July is limited, far below the level of the same period in previous years.
Figure 2 Changes in steel new orders index since 2019
Figure 3 Changes in the monitoring data of the weekly purchase volume of terminal wire and snails in the Shanghai stock market since 2018
In July , steel mill production declined overall. On the one hand, the demand side is operating at a low level, and the production willingness of steel plants is suppressed; on the other hand, the high temperature and rainy weather is not conducive to the safe production of steel plants, so the maintenance of blast furnaces in steel enterprises has increased. Overall, supply has declined. The production index in July was 26.1%, down 8.0 percentage points from the previous month. According to the statistics of China Iron and Steel Association, as of mid-July, the cumulative daily output of crude steel by key statistical enterprises was 2.058 million tons, a decrease of 6.4% from the previous month; the daily output of pig iron was 1.912 million tons, a decrease of 4.6% from the previous month; the daily output of steel was 2.02 million tons, a decrease from the previous month. 6.9%. The voluntary production restriction of steel mills has led to the compression of raw material demand and the reduction of sales pressure. The purchasing volume index was 26.8%, down 5 percentage points from the previous month, while the finished product inventory index was 33.0%, down 15.0 percentage points from the previous month. Steel mill inventories are depleting rapidly.
Figure 4 Changes in the steel production index since 2019
An important focus for the steel industry in July was steel prices. As the market demand continues to be sluggish and the market confidence is significantly insufficient, the market price of steel continues to weaken without a turning point in supply and demand. The Shanghai rebar price index shows that on July 1, the rebar price was 4,278 yuan/ton, the highest value in July, and then fluctuated all the way down. By July 21, the Shanghai rebar price dropped to 3,800 yuan/ton, a record high. The lowest price in the past 20 months, with a drop of more than 400 yuan / ton within the month. At the end of the month, there were constant calls for the steel market to bottom out, and merchants from all over the country actively bought the bottom, which led to a slight rebound in prices, but they were still relatively low. Raw material prices also weakened overall. First, the production contraction of steel enterprises has led to a decline in the demand for raw materials, which has weakened the support for raw material prices; the second is that the Fed’s interest rate hike process has led to a correction in global commodity prices. In July, the purchase price index was 24.6%, down 5.1 percentage points from the previous month, showing a downward trend for three consecutive months. Judging from the situation reflected by the enterprises, under the circumstance that the limited production led to a slowdown in the price of steel and the price of raw materials fell sharply, the profits of various products of the steel mills rebounded to varying degrees in July.
Figure 5 Changes in the steel purchase price index since 2019
Figure 6 Changes in Shanghai rebar price index since 2018
In August , the steel market demand may rebound. Although the high temperature and rainy weather will continue in August, the . More importantly, the meeting of the Political Bureau of the Central Committee on July 28 clearly pointed out that it is necessary to actively expand demand, maintain the bottom line of security in all aspects, and use reform and opening up to boost economic development. With the physical workload created by these policies, infrastructure investment is expected to speed up again, the real estate industry may improve marginally, and the steel market demand will have better support. It is expected that the steel market will recover for the better in August, and the demand for steel will pick up.
Steel mill production has resumed somewhat. In July , several steel mills voluntarily carried out blast furnace maintenance to reduce production. With the completion of blast furnace overhaul and the recovery of current profits, the company’s willingness to produce has picked up. If the market demand side recovers smoothly, the supply side of steel enterprises will also steadily improve.
Market prices may bottom out. With the supply side and production side expected to recover, steel prices may rebound slightly after continuous declines. At the same time, August is a gap period for the Fed to raise interest rates, and the commodity market may rebound to a certain extent. As the production of steel enterprises rebounds, the demand for raw materials will also recover, and the prices of raw materials may stop falling and rebound.
That’s even worse than last month, which was the worst I’ve seen. Any seasonal rebound should be viewed with the utmost suspicion!