Analysis of short-term fundamentals of the steel industry in China

1.Supply

The operating rate of electric furnaces has not been able to recover this year, because the spot price is low, and the electric furnace plant has basically no profits or even losses.

For blast furnace steel plants, traffic is blocked, which affects the transport of steel products and raw materials. Some blast furnace steel plants which have too many stocks started to repair and reduce production.

At present, the in-plant inventory of steel mills, mainly building materials, has reached about one month.

In order to avoid rusting that will reduce the quality of steel products, some companies began to produce steel billets.

However, most steel companies are optimistic about the future. In addition, due to the good performance of steel companies in the past few years, they have accumulated a lot of cash, which is also an important reason why companies are unwilling to take the initiative to reduce production.

As long as the blast furnace is profitable, it will not take the initiative to reduce production.

At present, the percentage of construction site resumption is still small, consumption has not yet started, and steel traders will not be active in getting goods.

There is not much room for short-term factory inventory decline. Even in the later period, traders receive steel the   inventory are just from the factory warehouses to the social warehouses.

And in late February, some traders have to order steel from the steel mills in late February, and they have to pay some security deposits, which will continue to increase the financial pressure on traders.

2. Consumption

At present, returning to work has gradually begun after the shutdown, but transactions are still sluggish.

According to the pace of resumption of work, the industries related to the national economy and people's livelihood are the first to resume work, followed by the manufacturing and construction industries.The resumption of work in the construction industry is behind most industries.

Due to the strong infection of Novel coronavirus pneumonia, strict control is taken over the outflow of rural personnel from various regions, and the shortage of personnel also restricted the start and resumption of work. According to the development of the epidemic situation, it is expected that some construction sites can start construction at the end of February, and the peak season corresponding to steel consumption may reach the end of March or April.

3.Inventory

The current stage of steel production is significantly higher than the demand for steel, which is manifested by a substantial increase in inventory.

This is also affected by the epidemic. According to past experience, consumption should start smoothly at this time, and reach its peak in April-May, then it is the rainy and high temperature season, and consumption starts to decline. The fact is that demand has indeed been delayed. Considering the pace of downstream construction and rush work, as well as the availability of personnel, the impact of the epidemic on March-April still exists. Therefore, high steel stocks are expected to become the biggest pressure on steel prices in the first half of this year.

When high inventory affects prices:

As stocks continue to increase, spot prices have loosened. Although some iron and steel companies have repeatedly proposed price support policies, due to the lack of downstream consumption and weak spot transactions, prices are still lacking in representativeness.

In some time periods, spot prices also rose slightly, driven by the futures market. After several years of substantial profits, iron and steel enterprises have relatively strong financial strength, so steel stocks are not a big pressure on steel companies. And most steel companies are still optimistic about future government stimulus policies and are optimistic about the future.

However, steel traders require fast turnover of goods and funds and a short cycle, which cannot solve the problem of liquidity in the short term.

In addition, steel traders generally use their own funds or carry out tray transactions through large state-owned enterprises.

If the price drops, the demand for capital return will be greater, and a deposit will be paid to the steel mill on the 20th of each month.

Rebars and hot coils have a certain shelf life and are prone to rust when stored for a long time. Under these circumstances, goods will be sold at low prices.

From the perspective of supply, demand and inventory of the fundamentals of the industry:

Spot: There is no basis for a sharp rise. As the short-term transactions are light and the slow start of consumption, it is expected that some companies with tight funds will take the lead in the market.

Futures: Before the consumption has not started, the futures and spot are not highly correlated, so the current futures are expected to be strongly related to the macro and various policies.

Therefore, when trading expectations, trading reality, inventory and spot prices return to the fundamental logic, the rebar and hot coil market prices are expected to fall.

                                                                        personal viewpoint,only for reference