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This year’s winter storage is different from previous years, at high prices, how will traders winter storage? In the face of high production costs, in what way do steel mills face the dilemma of their profits being swallowed up? After experiencing the sky-high inventory in 2020, how will this year’s winter inventory be interpreted?


The market trading atmosphere is weakening as the Spring Festival holiday approaches


On January 28, the national daily volume of construction steel was 45,600 tons, which has been below 100,000 tons/day for 5 consecutive days; the 5-day average volume was 67,700 tons, down 44% compared with the same period of last year’s lunar calendar, and the volume has been on a continuous downward trend since this year. Spot volume decline mainly from two aspects: First, the price caused. After a sharp rise in the price of black commodities in the fourth quarter of last year, the trend has slowed down this year but is still at a high level. In the face of rebar prices above 4,000 yuan/ton, traders are not willing to stock up. The second is caused by the new crown pneumonia epidemic. After the winter, the new crown pneumonia epidemic recurred in some areas, and the pressure of prevention and control increased, which affected the flow of people and commodities nationwide, especially in Hebei Province, as a major steel industry province, and the logistics were blocked further leading to a decline in turnover. As the Spring Festival holiday approaches, the weakened trading atmosphere in the spot market will become increasingly evident. 


In the seasonal off-season, steel prices overall under pressure 


Rebar has typical seasonal characteristics, winter due to cold weather caused by the inability to construction, the impact on demand is greater. According to the weekly data of related institutions, as of January 29, the apparent demand for rebar dropped 654,300 tons to 2,111,800 tons, and the total inventory rose 1,224,900 tons to 8,917,100 tons, with the apparent demand falling for 3 consecutive weeks and the total inventory rising for 5 consecutive weeks, making the seasonal off-season extremely obvious. Compared with previous years, the start of rebar inventory accumulation this year was late, not starting until the last week at the end of 2020, but thanks to the Chinese New Year, the total inventory accumulation time was guaranteed. The accumulative growth rate of rebar inventory was on the rise, with the absolute value rising from 330,500 tons in the first week of January to 1,224,900 tons in the last week of January. According to historical practice, the 2 to 3 weeks before and after the Spring Festival is the peak of inventory growth. If we conservatively calculate the growth rate at 1.2 million tons per week, the total rebar inventory will reach at least 14 million tons at the beginning of March, which is basically the same as the level in 2017-2019. Despite experiencing sky-high inventories in the past year, the absolute value of inventories is no longer the most central factor influencing prices, but in the off-season demand, inventories keep increasing and steel prices have the characteristic of being easy to fall but difficult to rise.


Raw material costs eat up profits, steel mills cut production in favor of price stability


The latest 15th round of coke price increases landed, up 100 yuan / ton, after the price increase of Rizhao Port, Shandong Province, quasi-class metallurgical coke reached 2970 yuan / ton, Tangshan City, Hebei Province, quasi-class metallurgical coke prices reached 2860 yuan / ton. At the same time, iron ore and scrap prices remain high. According to the research of related institutions, the average cost of steel billet with tax is currently RMB 3,957/ton for 10 sample steel mills in Tangshan City, Hebei Province, up RMB 141/ton week-on-week, with a net loss of RMB 97/ton compared to the ex-factory price of RMB 3,860/ton for normal billet on January 27, down RMB 91/ton week-on-week. The high cost of production has significantly eaten into steel mills’ profits. In the face of high costs and sluggish winter storage market, steel mills take the Spring Festival holiday to start dormancy mode in advance, and currently many regional steel mills announced the Spring Festival holiday program and shutdown maintenance notice. Production decline has been shown, as of January 29, rebar weekly production of 3,336,700 tons, down 108,500 tons week-on-week, the largest decline for the month. The short-term decline in production will help provide bottom support for steel prices and prevent prices from collapsing in the off-season. 


To sum up, the pressure faced by steel before the Spring Festival outweighs the opportunities. First, the double impact of the repeated new crown pneumonia epidemic (especially in Hebei Province) and the high price of rebar, dealers’ willingness to stock up is not high, and the spot trade started to cool down earlier; second, it is in the traditional seasonal off-season, with rising inventories and falling demand, and the price itself has the characteristic of being easy to fall but difficult to rise. It is worth affirming that raw materials on the steel profit devouring lead to steel mills overhaul increase, production decline favorable prices, the probability of steel prices shock lower than the short term plunge, and the retracement space should not see too much.


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