The steel market continues to show a sustained increase in production, with steel mills maintaining high output levels without any signs of reduction. Despite the ongoing decline in inventory, it remains higher compared to previous years. In addition, steel demand in June has entered its off-season period, and the overall oversupply situation is unlikely to improve in the coming month. As a result, steel prices are expected to remain under pressure.
On the macroeconomic front, the economy still shows signs of weakness, and major stimulus policies from the government seem unlikely in the near term. This environment keeps investors cautious about taking on risk, which further supports the weak price trend for steel.
Although steel prices have dropped significantly from their early-year highs, some market participants are still eager to enter the market. While a short-term technical rebound driven by fund activity is possible, the medium-term outlook for steel prices remains bearish.
Looking back at May’s price movements, the market remained in a range between 3,500 and 3,700, with both longs and shorts engaged in a tight battle. The open interest continued to rise, peaking at 1,976,540 contracts on May 16, surpassing the previous record of 1,971,454 set on September 5th. By May 24, the open interest had slightly declined to 1,771,476 contracts, still more than 390,000 contracts above the level at the end of April.
The high level of open interest reflects market uncertainty regarding the direction of steel prices. On one hand, the fundamental supply-demand imbalance persists, encouraging trend traders to stay active. On the other hand, after over three months of declines, current prices are not far from last year's lows, prompting some funds to look for potential bottom-fishing opportunities, especially as many steel varieties have already seen rebounds from low levels.
Overall, May’s steel prices remained in a weak trend, with the broader downward movement still intact.
**Part II: Fundamental Analysis**
The economic situation has deteriorated, and market risk appetite remains subdued. Initially, there was hope that the second quarter would bring seasonal recovery, but the April data from the National Bureau of Statistics did not meet expectations. Fixed asset investment growth slowed to 20.1% year-on-year, with infrastructure investment dragging down the overall pace, particularly in water conservancy, environmental protection, and public utilities, where growth dropped to 11.88%. Manufacturing investment also continued to decline after a brief rebound in March.
While industrial output rose to 9.3% year-on-year in April, up from 8.9% in March, this was largely due to base effects. Compared to the market’s expectation of 9.5%, the actual figure still fell short. The underlying economic weakness has persisted, leading to declining risk appetite and reduced interest in risky assets.
Steel production continues to set new records, with daily crude steel output reaching 2.12 million tons in early April and climbing further to 2.193 million tons in early May. This is the highest level since the same period last year. Despite falling steel prices, mill production remains strong, supported by lower raw material costs and favorable seasonal conditions. Steel mills still expect better performance later in the year.
There are two key factors behind the high production levels. First, May is typically the peak month for steel output. Second, although some blast furnaces in Tangshan have been shut down, most of them were already offline, so they do not significantly impact current production. Additionally, steel mills have not yet reached the point where large-scale production cuts are necessary.
The real estate market exceeded expectations. Although sales were expected to slow after the implementation of the "five regulations" in March, April saw a 40% year-on-year increase in sales area, outpacing March’s 27%. New housing starts initially dropped by 20% in March, but with local governments softening regulations and no additional pressure from the central government, developers resumed construction efforts, leading to a 14.5% year-on-year increase in new starts in April. This boosted real estate investment, which grew by 23% year-on-year in April—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 continued to fall, with iron ore inventories stabilizing after months of decline. Port inventories increased for four consecutive weeks, reaching 7.61 million tons by May 24, though still 21 million tons below the same period last year. With rising stockpiles, the market’s optimism about price support has faded. Iron ore prices have fallen below $130, with the Platts index hitting $123 on May 23, the lowest since mid-December of the previous year.
Billet prices have also weakened despite a rapid decline in inventory. Banks have tightened supervision on billet pledges, contributing to tighter liquidity and putting downward pressure on prices. With falling ore prices, rebar production costs have also declined, dropping to 3,517 yuan per ton as of May 24.
Social inventories continued to fall in May, reaching 18.61 million tons by May 24, down 620,000 tons from the end of April. However, they remain 2.82 million tons higher than the same period last year. Steel mill inventories, however, have risen, reaching 13.09 million tons at the end of May—still above the 11.22 million tons recorded in the same period last year. With the end of the peak season, if production remains high, steel mill inventories may rise again, potentially forcing mills to cut ex-factory prices.
**Part III: Market Outlook**
With continued high production and limited demand, the oversupply situation in the steel market is unlikely to improve in the coming month. Steel prices are expected to remain weak. At the same time, the macroeconomic environment remains weak, and the government is unlikely to introduce major stimulus measures. This will keep investors cautious, reinforcing the bearish outlook for steel prices.
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