**Steel Market Outlook: Weak Prices Expected Amid Oversupply and Macroeconomic Challenges**
The steel industry has seen a sustained increase in production, with mills not showing any signs of reducing output. Although inventory levels have been declining, they remain higher than in previous years. Meanwhile, steel demand in June is entering its off-season, and the overall market continues to face an oversupply situation. As a result, steel prices are likely to remain weak in the coming month.
On the macroeconomic front, the outlook remains weak, and it’s unlikely that major stimulus policies will be introduced by the government soon. This has led investors to adopt a cautious approach toward riskier assets, further pressuring steel prices.
Although steel prices have dropped significantly from their early-year highs, some traders are still looking for opportunities. While a short-term technical rebound could occur due to fund activity, our mid-term view remains bearish on steel prices.
Looking at the futures market, May saw continued volatility as both long and short positions remained concentrated between 3500 and 3700. The open interest reached a record high of 1,976,540 contracts on May 16, surpassing the previous record set on September 5th. By May 24, the open interest had slightly decreased to 1,771,476 lots, still well above the level at the end of April. This high level of open interest reflects market uncertainty regarding the direction of steel prices.
The large number of open contracts indicates diverging views on price trends. On one hand, the fundamental supply-demand imbalance in the steel sector persists, with trend traders continuing to enter the market. On the other hand, after more than three months of declines, current price levels are close to last year's lows, prompting some funds to look for buying opportunities, especially after several steel varieties experienced rebounds.
Overall, May saw continued weakness in steel prices, with the downward trend remaining intact.
**Fundamental Analysis**
The economic environment has deteriorated, and investor risk appetite remains low. Market expectations for a seasonal recovery in the second quarter were not met. In April, fixed asset investment growth slowed to 20.1% year-on-year, dragged down by a decline in infrastructure and manufacturing investment. Industrial output, while rising to 9.3%, was mainly driven by base effects, falling short of the expected 9.5%.
This ongoing macroeconomic weakness has dampened market sentiment, making risky assets less attractive in the short term.
Production levels continue to set new records. In the first half of April, daily crude steel output averaged 2.12 million tons, rising to 2.193 million tons in the first half of May—the highest level in the year. Despite lower steel prices, mills remain active due to lower raw material costs and seasonal demand. However, this production level may not be sustainable, as blast furnace utilization rates are beginning to decline.
While measures like shutdowns in Tangshan have been implemented, most affected facilities are already offline, so they won’t impact future production. Steel mills are still operating at profitable levels, and there’s no indication of large-scale production cuts.
In the real estate sector, sales outperformed expectations. April saw a 40% year-on-year increase in sales area, higher than March’s 27%. New housing starts also rebounded in April, driven by local governments easing regulations. This has supported real estate investment, which grew by 23% year-on-year—the highest in four months.
Looking ahead, real estate policy is expected to remain stable, supporting a moderate recovery in the sector.
Raw material prices have continued to fall. Iron ore inventories have stabilized after months of drawdowns, but remain below last year’s levels. With falling steel prices and rising port stocks, iron ore prices have dropped below $130 per ton. The Platts index hit $123 on May 23, the lowest since mid-December 2022.
Billet prices have also fallen despite a sharp drop in inventory. Banks have tightened lending standards, affecting the billet market and limiting price support.
With lower raw material costs, rebar production costs have declined sharply, reaching 3,517 yuan/ton by May 24.
Social inventories have continued to fall, but remain higher than last year. Steel mill inventories, however, have increased, reflecting strong production levels. If output remains high, mill inventories may rise again, putting pressure on ex-factory prices.
**Market Outlook**
With continued high production, declining but still elevated inventory, and weak demand in June, the steel market is likely to remain oversupplied. This suggests that prices will stay under pressure. Combined with weak macroeconomic conditions and limited policy support, investor caution is expected to persist, keeping steel prices weak in the near term.
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