In May, the domestic steel market failed to bring any hope of stabilization. Instead, it continued the downward trend from April, with prices consistently falling across the board. The weak demand combined with high production levels caused a widening gap between spot and futures prices, signaling a growing downward trend. Many regions experienced sharp declines, forcing steel mills to lower their ex-factory prices in an attempt to boost sales. Traders were forced to sell at a loss, withdraw capital, reduce inventory, and even slash prices dramatically. A sense of panic gripped the market, with pessimism spreading rapidly. Trading activity remained light, and traders anticipated further deterioration.
According to data monitoring, as of May 31, the mainstream price of 22*9 third-grade rebar in Xicheng, Shanghai area was 3,170 yuan/ton, down by 310 yuan/ton compared to the same period last month. The mainstream offer for 5.5*1500 carbon hot coils in the sunshine production market was 3,370 yuan/ton, a drop of 320 yuan/ton. Meanwhile, WISCO's 1.0*1250 cold plate was priced at 4,440 yuan/ton, down 230 yuan/ton from the previous month. All major steel products saw significant price drops, with no clear signs of stabilization. Prices are still expected to continue falling in the near future.
The author believes that the main reasons behind the price decline in May include:
First, the sluggish macroeconomic environment led to lower-than-expected steel demand. Weak investment and trade performance resulted in a slower-than-anticipated economic growth rate in the first four months of 2013. Real estate, infrastructure, home appliances, and automotive industries all saw reduced investments. Additionally, weak global demand led to a sharp decline in China’s exports, which significantly impacted the demand for raw materials like steel. As downstream industries struggled, the pace of destocking slowed, keeping the steel spot market in a downturn.
Second, crude steel production reached a new high, increasing supply pressure. According to the China Iron and Steel Association, the daily output of key enterprises in mid-May was 1.741 million tons, a slight decrease from the previous month. However, national crude steel output was estimated at 2.185 million tons, also slightly down. Despite this small decline, the overall production remains high, and steel mills have been slow to cut output. Falling raw material prices, such as iron ore and billets, have lowered production costs, reducing the incentive for mills to cut back. It is estimated that the cost of steel rebar at the end of May was nearly 220 yuan/ton lower than at the end of April.
Third, the steel trading market lacks confidence, leading to widespread price cuts. With weak economic growth and limited policy stimulus, the steel market has become increasingly pessimistic. Traders are hesitant to buy, middlemen struggle to find buyers, and orders from end-users are declining. Most steel traders are focused on clearing inventory, resulting in aggressive price reductions. This creates a cycle where oversupply leads to further price drops, weakening market support.
Looking ahead to June, three factors will shape the steel market:
1. Seasonal demand remains weak. Although May saw a slight increase in terminal demand compared to April, the market did not respond strongly due to flat growth rates. With the onset of summer, demand is expected to fall again. Moreover, the government is unlikely to implement large-scale economic stimulus measures, so steel demand in June will likely remain sluggish.
2. Steel mill production cuts have not been effective. Historically, steel mills have avoided cutting production unless prices fall below their marginal cost. Currently, steel prices are still above reasonable cost levels, meaning production cuts will be slow and ineffective. This will keep supply pressures high, continuing to weigh on prices.
3. Raw material prices may stabilize. After a month of continuous declines, iron ore and billet prices hit a three-year low. While they may not have fully bottomed out, steel mills are likely to accelerate procurement to replenish stocks. This could lead to a stabilization or consolidation in the raw material market.
In conclusion, with the arrival of summer and seasonal demand decline, the steel industry is entering a weaker phase. With no immediate signs of macroeconomic improvement, demand for steel is unlikely to recover. At the same time, falling raw material prices mean that steel mills will struggle to reduce output, keeping supply-demand imbalances in place. The market is expected to remain weak, possibly continuing its volatile downward trend.
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