Is the Steel Market Still up or is It A Callback?

The steel bar market went up yesterday, what will happen next? What is it affecting the market? How are the profits of steel factory? Many investors consider that the market will decline very soon, will this happen?

Luwei, the Black Metal Researcher from Hongkai Fund

The futures board obviously swung caused by the production restriction in Tangshan. Finished product was higher than raw material, and hot rolling coil was higher than steel bar. The finished product board had been flat or premium after the continuous raise, and the basis had been repaired earlier. For spot side, there was no much difference on supply and demand sides. The actual demand in the downstream was not improved. The price increases was limited due to unimproved downstream demand and even the volume was better, it would be driven by the disk or future-spot arbitrage entrance, which caused the misgiving in the bulls, and the futures disk came down.

According the market price, steel factories profit gets better improved. The raw material price is stable while the finished product price rises up over 100Yuan/MT. As to future market, steel bar profit rises up over 400Yuan from 200Yuan/MT, and HR steel coil profit come up more than 200 from 0Yuan/MT.

As the future market stick to the production restriction on June 27, we cannot prove the track, so even if decline, it will be limited. I think the policy will be fully carried out as to the worst air condition in Tangshan, and the upcoming National Day.

Caiyuan Qi, Black Metal Researcher from Guosen Securities

The production restriction policy claimed by Tangshan government since 2018 winter to the first half year of 2019 always keeps a strong timeliness and specific purpose, to fix the air condition. Mostly, the policy performance cannot reach expected effect, which coincides with weekly output date from Mysteel. Therefore, the whole market realizes the action of Tangshan government in July will affect the operation rate, especially on steel coil. In the other hand, the steel market now is off season, some steel factories are planning the repair for blast furnaces. We prefer to believe the steel price raise involved more expected funds, and the persistence of actual production is uncertain.

Under the raise pressure of iron ore, in futures market, the steel bar profit drops to less 200Yuan/MT, and the HR coil profit has been negative for one time. We calculate that the actual profit for steel bar is less 500Yuan/MT. From macroscopic perspective, the profits of steel and coke companies are narrowed by iron ore, and the profit of industry chain has to redistribute. There is big flexible profit space on finished products according to 500Yuan/MT peak profit of steel bar in futures market.

Considering the futures and spot market, the basis is around 0 axis. The short-term price increase continues to weaken and falling back trend is strong. But there are two factors who affect the futures market way. Firstly, there may be capital chasing due to the production restriction before Aug; secondly, the extension demand of steel toughness in slack season, and together with the storage quantity will be the necessary reference dates for steel futures market changes in July.

Chenxuefeng Steel Mine Researcher from Zheshang Futures

The steel bar price in futures market was mostly leaded by logic of cost in the few weeks. According to our date, the exercise price was rarely lower than production cost in Oct. of the past 10 years. With the iron ore price raise, the steel bar will be drove to go up at the beginning. But due to the production restriction policy in Tangshan, the passive increase of finished product turned into profit repair of steel factories. We think the output of June will be at the level in March. The finished product storage will be reduced or destocked in slack season, if there is no production increase in other area steel factories.

Looking ahead, the demand still controls the market of finished product from long period of time. Our demand for real estate is still stable, and we do not think that the demand will break as the low storage-to-sales ratio of real estate, and the impetus for real estate. The infrastructure demand part can still be expected. We are cautiously optimistic about the overall thread demand. In the overall direction, we recommend to do more threaded October contract on the dips, and the callback space is expected to be limited. At present, our calculated October contract profit is 373 yuan / ton, which has been obviously repaired since last week. As for the position above the profit, we can refer to the disk profit of April.