Common steel: Production continues to be reduced, and demand is expected to be released after the epidemic improves

Overview: China's steel industry has experienced four cycles since the new millennium

In 1996, China's crude steel output exceeded 100 million tons for the first time and reached the world's first place. In the following 26 years, China has firmly held the top spot, with crude steel output accounting for 53% of the global total in 2021.

From 2001 to 2022, China's steel industry underwent four cycles, each of varying duration. Specifically: From 2001-2008, rapid economic growth, industrialization, and urbanization fueled booming real estate and manufacturing sectors. Steel prices rose steadily, experiencing a correction in 2005 due to overcapacity, but high demand prevailed, peaking mid-2008. The 2008 US subprime mortgage crisis triggered a global downturn, sharply impacting steel prices. From 2009-2015, economic recovery and the "Four Trillion Yuan Plan" stimulated real estate and infrastructure, leading to short-term price increases. However, severe overcapacity and slowing growth caused a four-year price decline, with many steel mills operating at a loss. From 2016-2019, the industry focused on de-capacity. By June 30, 2017, the elimination of 140 million tons of illegal steel capacity ("ditiao gang") was completed. Reduced off-balance-sheet capacity improved supply-demand dynamics, raising prices. However, increased scrap steel use boosted supply, causing prices to fall after peaking. From 2020 onward, the COVID-19 pandemic caused a global recession and inflation, while post-pandemic reconstruction supported steel demand. Simultaneously, the dual carbon policy reduced supply. Late 2020, the Ministry of Industry and Information Technology announced crude steel production cuts. Increased supply, demand, and costs drove rapid price increases. However, from October 2021, increased pressure on the real estate sector weakened demand, causing prices to fall.

Supply: Dual carbon strategy restricts supply growth

The steel industry is a key carbon-emitting industry

The steel industry is one of the industries with the highest proportion of carbon emissions globally and domestically. From the perspective of global carbon emissions by sector, according to the World Green Building Council's "2018 Global ABC Report" and IEA data, in 2018, the combined carbon emissions from the cement, steel, and electrolytic aluminum industries accounted for approximately 22.7% of global total carbon emissions, with steel second only to cement, accounting for 10.1%. From the perspective of domestic carbon emissions by sector,

In September 2020, the Chinese government announced to the international community that it would increase its Nationally Determined Contributions (NDCs) and adopt more forceful policies and measures to strive to peak carbon dioxide emissions before 2030 and strive to achieve carbon neutrality before 2060. On January 26, 2021, Huang Libin, spokesperson of the Ministry of Industry and Information Technology and director of the Department of Operation Monitoring and Coordination, introduced at a press conference held by the State Council Information Office that reducing steel production is an important measure for China to achieve its carbon peak and carbon neutrality goals. The Ministry of Industry and Information Technology will combine the overall trend of current industry development, focusing on achieving phased goals of carbon peaking and carbon neutrality, gradually establishing a stock constraint mechanism based on carbon emissions, pollutant emissions, and total energy consumption, and study and formulate relevant work plans to ensure that a year-on-year decrease in steel production is fully achieved in 2021. On March 20, 2021, Li Xinchuang of the China Metallurgical Industry Planning & Research Institute introduced that the "Action Plan for Carbon Peak and Carbon Reduction in the Steel Industry" proposes that the steel industry will achieve its carbon emissions peak before 2025; by 2030, the steel industry's carbon emissions will be reduced by 30% compared to the peak.

The goal of reducing crude steel production under the background of carbon neutrality is clear

On December 29, 2020, Xiao Yaqing, Minister of Industry and Information Technology, stated at the 2021 National Conference on Industrial and Informationization that it is necessary to implement the industrial low-carbon action and green manufacturing project around the carbon peak and carbon neutrality target nodes. As an energy-intensive industry, the steel industry must resolutely reduce crude steel production to ensure a year-on-year decrease in crude steel production. On January 26, 2021, Huang Libin, spokesperson of the Ministry of Industry and Information Technology and director of the Department of Operation Monitoring and Coordination, stated at a press conference held by the State Council Information Office that crude steel production will be resolutely reduced in 2021 to ensure a year-on-year decrease in crude steel production. First, it is strictly forbidden to add new steel production capacity. Second, improve relevant policies and measures. Third, promote mergers and acquisitions in the steel industry and promote an increase in industry concentration. Fourth, resolutely reduce steel production.

On April 1, 2021, China's National Development and Reform Commission and Ministry of Industry and Information Technology announced plans for a review of steel de-capacity efforts and crude steel production reductions. This review ("look back") examined progress and implementation of de-capacity measures since 2016, focusing on: 1. Shutdown and closure of smelting equipment related to excess capacity reduction and the crackdown on illegal steel ("ditiao gang"). 2. Construction, commissioning, and operation of steel smelting projects. 3. Corrective actions taken on issues identified in previous inspections. 4. Verification and rectification of reported issues. 5. Activities of the leading group responsible for resolving excess steel capacity. 6. Progress on 2021 crude steel production reduction targets.

In the second half of 2021, through strict reduction of steel production, China's total crude steel production finally reached 103.279 million tons, a year-on-year decrease of 3%, compared to a 5.2% increase in the previous year; steel production reached 133.667 million tons, an increase of 0.6%, with the growth rate falling by 7.1 percentage points year-on-year. Coke production was 46.446 million tons, down 2.2%, compared to a 0.04% increase in the previous year. Ferroalloy production was 34.76 million tons, down 4.4%, with the decline widening by 1.7 percentage points. From 1990 to 2020, China's crude steel production has steadily increased year by year, with only a brief decline in 2015 due to supply-side reforms. The reduction of crude steel production capacity in recent years is of great significance and is in line with China's economic transition from high-speed development to high-quality development.

On April 19, 2022, Meng Wei, spokesperson of the National Development and Reform Commission, stated at a press conference on the reduction of crude steel production that in 2022, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Ecology and Environment, and the National Bureau of Statistics will continue to carry out the national crude steel production reduction work, guiding steel enterprises to abandon the extensive development model of focusing on quantity and promoting high-quality development of the steel industry. In the process of reducing crude steel production, we will adhere to "one general principle and highlight two key points." One general principle is to firmly grasp the general tone of stability first and seeking progress through stability, while maintaining the continuity and stability of the supply-side structural reform policies in the steel industry, adhering to the principles of marketization and the rule of law, giving play to the role of the market mechanism, stimulating the enthusiasm of enterprises, and strictly enforcing relevant laws and regulations on environmental protection, energy consumption, safety, and land use. The two key points are to insist on differentiating situations, maintaining some while reducing others, avoiding a "one-size-fits-all" approach, highlighting the reduction of crude steel production in key regions such as the Beijing-Tianjin-Hebei region and its surrounding areas, the Yangtze River Delta region, and the Fen-Wei Plain, which are key areas for air pollution control, and highlighting the reduction of crude steel production with poor environmental performance, high energy consumption, and relatively backward process equipment levels among key targets. The goal is to ensure that a year-on-year decrease in national crude steel production is achieved in 2022.

From January to April 2022, the reduction of crude steel production continued, and low profits led to short-term production cuts in electric arc furnaces

From January to April 2022, a total of 336 million tons of crude steel were produced nationwide, a year-on-year decrease of 10.30%, with a daily average of 2.8013 million tons; 280 million tons of pig iron were produced, a year-on-year decrease of 9.40%, with a daily average of 2.3358 million tons; and 427 million tons of steel were produced, a year-on-year decrease of 5.90%, with a daily average of 3.5568 million tons. With the annual economic growth rate maintained at the target of 5.5%, infrastructure, real estate, and manufacturing all need to make efforts, and the annual steel consumption is expected to be similar to last year. Currently, affected by the epidemic, some demand has been delayed. It is expected that as the epidemic eases and rush work arrives, demand will gradually be released. In a meeting with various steel mills, the China Iron and Steel Association pointed out that in 2022, the national crude steel output in 2021 will be used as the base, and a year-on-year reduction of more than 10 million tons will be implemented. Judging from the data from January to April, crude steel production has decreased by nearly 35 million tons, and crude steel production in the second half of the year may increase by about 25 million tons year-on-year, but the daily crude steel production will decline month-on-month. Considering the extreme situation of real estate in the second half of last year, if a GDP growth rate of 5.5% is to be achieved, the demand this year will also be low in the first half and high in the second half, and the incremental amount in the second half may exceed 25 million tons.

In April 2022, the national average daily crude steel output was 3.0925 million tons, a month-on-month increase of 8.58%, and a year-on-year decrease of 5.18%; the national average daily pig iron output was 2.5593 million tons, a month-on-month increase of 10.81%, and a year-on-year increase of 1.06%. Affected by the Winter Olympics and the epidemic, the crude steel output in the first four months decreased significantly. The top three regions with the largest decrease in output were Hebei Province (-14.0375 million tons or -17.04%), Shandong Province (-6.4268 million tons or -21.88%), and Jiangsu Province (-2.623 million tons or -6.07%). On May 27, 2022, the blast furnace operating rate of 247 steel mills nationwide was 83.83%, a week-on-week increase of 0.82 percentage points, and a year-on-year increase of 2.9 percentage points; the iron production capacity utilization rate of 247 steel mills nationwide was 89.26%, a week-on-week increase of 0.6 percentage points, and a year-on-year increase of 2.69 percentage points. The current operating rate is at a relatively low level in recent years, and with the orderly resumption of work and production in various places, the blast furnace operating rate has increased.

On May 27, 2022, the national electric arc furnace operating rate was 67.91%, a week-on-week decrease of 1.71 percentage points, and a year-on-year decrease of 15.37 percentage points. The profit of electric arc furnaces in East China was -38 yuan/ton, a week-on-week increase of 27 yuan/ton, and a year-on-year decrease of 226 yuan/ton; the profit of electric arc furnaces in North China was -122 yuan/ton, a week-on-week decrease of 57 yuan/ton, and a year-on-year decrease of 429 yuan/ton. In the low-profit market environment, the total supply of steel has declined for two consecutive weeks, which has to some extent supported steel prices.

Demand: Real estate new starts are weakening, and the prosperity of the manufacturing industry is still acceptable.

In 2021, national fixed asset investment increased by 4.9%, and the average growth rate in two years was 3.9%. From January to April 2022, national fixed asset investment (excluding farmers) totaled 15.3544 trillion yuan, a year-on-year increase of 6.8%. Sheng Songcheng, former director of the Survey and Statistics Department of the People's Bank of China, mentioned in "Why Infrastructure Investment Can Become an Important Tool for Stabilizing Growth" that in 2021, real estate, infrastructure, and manufacturing investment accounted for 24%, 25%, and 32%, respectively, and other investments accounted for 19%, with manufacturing investment accounting for the largest proportion.

The manufacturing investment data in the first quarter showed highlights, but the sustainability is questionable. According to data from the National Bureau of Statistics, from January to April 2022, manufacturing investment increased by 12.2%, of which manufacturing enterprises' technological transformation investment increased by 17% year-on-year, accounting for 43.1% of total manufacturing investment, an increase of 1.8 percentage points compared with the same period in 2021. From January to April, investment in high-tech manufacturing increased by 25.9%, continuing the high prosperity of double-digit growth, such as the manufacturing of electronic and communication equipment and medical instruments and instruments, with investment growth of 30.8% and 29.4%, respectively. Due to the continuous impact of the international situation and the epidemic on the consumption of end products and raw material prices, the profits of manufacturing enterprises have generally been squeezed, especially small and medium-sized private enterprises with weaker risk resistance. The pressure to maintain high-speed growth in manufacturing investment throughout the year is relatively high.

Real estate investment is not optimistic. Although there are many policy supports, it is still difficult to reverse the prosperity in a short period of time. According to data from the National Bureau of Statistics, from January to April, national real estate development investment totaled 3.9154 trillion yuan, a year-on-year decrease of 2.7%. From January to April, the area of housing construction under development by real estate development enterprises was 818.588 million square meters, remaining flat year-on-year. Among them, the area of residential construction was 577.692 million square meters, a year-on-year decrease of 0.1%; the area of new housing starts was 39.739 million square meters, a decrease of 26.3%. From January to April, the sales area of commercial housing was 39.768 million square meters, a year-on-year decrease of 20.9%; among them, the sales area of residential housing decreased by 25.4%. The sales value of commercial housing was 3.7789 trillion yuan, a decrease of 29.5%; among them, the sales value of residential housing decreased by 32.2%. Although various places have successively introduced policies to relax real estate, specific measures include relaxing purchase restrictions and loan restrictions, lowering down payment ratios, and lowering mortgage interest rates, the effect is limited at present, and the situation of low investment will continue, and real estate development investment throughout the year may decline.

The role of infrastructure investment in the first quarter was obvious, and it will remain an important force for economic growth in the future. At present, infrastructure investment has become an important force for stabilizing growth in China in 2022, and the construction of a series of major projects such as railways, highways, bridges, tunnels, water conservancy, and urban rail transit is in full swing. According to data from the National Bureau of Statistics, from January to April 2022, infrastructure investment (excluding electricity, heat, gas, and water production and supply) increased by 6.5% year-on-year. Among them, investment in water conservancy management increased by 12.0%, investment in public facilities management increased by 7.1%, investment in road transport increased by 0.4%, and investment in railway transport decreased by 7.0%. The growth rate of investment in public facilities management and road transport is acceptable, but continuous efforts are still needed to achieve stable growth. In recent years, China's total output of construction steel (rebar, wire rod) has remained at around 400-450 million tons, and together with other plates and profiles, construction steel accounts for about 55% of steel consumption. In addition to the manufacturing sector, factory buildings (including steel structure factory buildings) and other fixed asset investments involve steel, and construction steel is mainly used in the real estate and infrastructure sectors, with the proportion of steel used by the three being approximately 1:6:3.

Real estate continues to be sluggish, and it is expected to improve marginally under the stimulus of multiple policies.

Rebar demand is highly correlated with real estate. Since this year, the data on new real estate starts have continuously shown negative year-on-year growth. The weakening of the total amount corresponds to a significant decline in rebar demand. The real estate development construction cycle is: land acquisition - start-up - construction - completion - sales - delivery and decoration. It takes 2-3 years for a real estate project from land acquisition to completion. Usually, developers start construction 1-6 months after land acquisition, and the per-unit-area steel consumption is the largest in the first 1-3 months of new construction. After the completion of the foundation engineering, the per-unit-area steel consumption will be reduced to less than half of the previous level, so the area of new construction is closely related to the steel demand of the real estate industry. Since February 2021, the cumulative year-on-year decline in the area of new real estate starts has continued, posing a challenge to the future steel consumption of the real estate industry.

There is a significant correlation between rebar, which accounts for the highest proportion of construction steel, and the year-on-year growth rate of newly started housing area, construction area, and completed area. Since the second half of 2020, the introduction of new regulations on financing supervision for the real estate "three red lines" has had a certain deterrent effect on the high-debt, high-leverage real estate industry. Real estate regulatory policies have been continuously upgraded, and many real estate companies have fallen into liquidity crises. Against the backdrop of the continued downturn in the real estate market, a series of easing policies have been introduced to try to reverse this situation, but the current results are not yet apparent. Current housing development indicators remain at relatively low levels. As of April 2022, the year-on-year growth rate of newly started housing area was -26.3%, an expansion of 8.8 percentage points from the previous month; the year-on-year growth rate of housing construction area was 0, down 1% from the previous month; and the year-on-year growth rate of completed housing area was -11.9%, an expansion of 0.4 percentage points from the previous month. As time goes on, the negative impact of the decline in newly started area on steel consumption will gradually become apparent.

Real estate companies' land acquisition has become a good leading indicator of new housing starts. Before the start of real estate construction, developers need to obtain land development rights through transactions with the government. There is a period of about 1-6 months between land acquisition and construction, so the land transaction situation can be used to predict the area of newly started housing. The China Index Academy released the "2022 Top 100 Ranking of National Real Estate Companies' Land Acquisition in January-April," which points out that in the first four months of 2022, the total land acquisition amount of the top 100 companies was 362.6 billion yuan, a year-on-year decrease of 55.9%. In the past ten years, the commodity housing transaction area indicator has generally led the steel production indicator, but the two diverged after 2017. It was not until 2020, when the epidemic outbreak weakened demand, that they both fell to the trough. Currently, the transaction area of 30 cities has seen a slight rebound after bottoming out in early May.

In addition to land transactions and commodity housing transaction areas, the market's capital stock and financing level also affect developers' investment intentions. After the introduction of the "three red lines" policy for the real estate industry in 2020, financing channels were restricted, and real estate companies actively adopted a "price-for-volume" approach to quickly recover funds. Commodity housing sales are particularly crucial, and residents' purchasing power is closely related to personal mortgage loans in real estate development funds. As of the end of April, personal mortgage loans in real estate development funds showed a year-on-year decrease of -25.1% and a month-on-month decrease of -6.3 percentage points, falling continuously since February last year. We expect that as financing regulatory policies are relaxed, the pressure of sales proceeds on real estate companies' investment will gradually decrease, thereby driving steel consumption. As a strongly cyclical industry, real estate is significantly affected by the macroeconomic situation and monetary policy. Taking monetary policy as an example, a reduction in loan interest rates will be conducive to the recovery of real estate sales and the increase in steel demand. A loose monetary policy will drive up real estate prices, indirectly promoting the consumption of construction steel. Considering the situation of funds in place, it is not difficult to find that when the year-on-year growth rate of M2 is high, the consumption and price of rebar will also increase to a certain extent. The M2 growth rate leads the rebar price index by about six months to one year. At the end of April, the M2 balance was 249.97 trillion yuan, a year-on-year increase of 10.5%, with the growth rate being 0.8 and 2.4 percentage points higher than the previous month and the same period last year, respectively. The faster growth of M2 in April also reflects the financial sector's proactive efforts to support the development of the real economy.

Infrastructure investment takes over from real estate, with its supporting role becoming increasingly apparent.

Infrastructure, as another major consumer of steel in the construction industry, and considering the gradually increasing proportion of steel structure buildings in today's infrastructure, accounts for more than 25% of total steel consumption. In terms of structure, transportation, warehousing, and postal services account for the highest proportion, but this proportion is declining, with a significant slowdown in growth since 2016, which has significantly dragged down broad infrastructure investment; water conservancy, environmental protection, and public facilities management account for the second highest proportion, and this proportion is increasing, with a significant increase in growth since 2016; the proportion of electricity, heat, gas, and water production and supply is relatively stable. According to existing data, the proportions of transportation, warehousing, and postal services, water conservancy, environmental protection, and public facilities management, and electricity, heat, gas, and water production and supply in broad infrastructure investment are approximately 35%, 17%, and 48%, respectively. This year, under the requirement of proactive policy efforts, the issuance of special bonds has been significantly advanced. In the first quarter, government bond financing increased significantly by 923.8 billion yuan year-on-year, reaching 1.58 trillion yuan. Together with the approximately 1.2 trillion yuan of special bonds issued in the fourth quarter of last year, the "scale of special bond funds is relatively large" this year, and most of these funds are flowing into infrastructure projects.

Due to the large scale of infrastructure projects, long investment cycles, and high industry barriers, the infrastructure industry is one of the construction sub-sectors with the highest market concentration, with central enterprises accounting for the vast majority of market share. The year-on-year growth rate of newly signed contracts in the construction industry under the operating indicators of the four major central construction enterprises is selected as a consistent indicator for studying steel consumption. Judging from the orders of central construction enterprises, orders in the first quarter were acceptable, to some extent offsetting the gap caused by the real estate sector.

Manufacturing investment data shows highlights, but sustainability is questionable.

The proportion of steel demand in major downstream industries is as follows: real estate (30%), infrastructure (25%), machinery (17%), automobiles (7%), home appliances (5%), energy (4.5%), ships (2%), and containers (0.5%). In the manufacturing industry, the machinery, automobile, and home appliance industries consume large amounts of steel and have a significant impact on the prosperity of the steel industry. From January to April, the machinery industry turned from growth to decline, with added value decreasing by 0.7% year-on-year, compared to a growth of 5.2 percentage points in the first three months. Exports of electromechanical products increased by 6.7%, with export growth continuously declining. In April, the output of excavators, a representative product of engineering machinery, decreased by 58.9%, cement-specific equipment and metal-cutting machine tools turned from growth to decline, the output of large tractors decreased further, the output of atmospheric pollution control equipment maintained growth, but the growth rate narrowed. Exports of electromechanical products turned from growth to decline, decreasing by 1.8%.

From January to April, the production and sales of automobiles both reached 7.69 million units, down 10.5% and 12.1% year-on-year, respectively, turning from growth to decline due to factors such as the epidemic. The production and sales of new energy vehicles maintained rapid growth, with a year-on-year increase of more than 100%. 720,000 vehicles were exported, a year-on-year increase of 39.4%, but the growth rate slowed down. In April, automobile production and sales fell sharply, reaching 1.21 million and 1.18 million units, respectively, with month-on-month decreases of 46.2% and 47.6%, and year-on-year decreases of 46.1% and 47.6%, respectively, the lowest level for the same period in nearly ten years. 140,000 vehicles were exported, with a month-on-month decrease of 17.2% and a year-on-year decrease of 6.6%. From January to April, the output of the three major white goods in the home appliance industry all decreased year-on-year. Refrigerator production was 27.25 million units, down 7.5% year-on-year; washing machine production was 27.93 million units, down 4.3% year-on-year; and air conditioner production was 77.43 million units, down 0.7% year-on-year. From January to April, the export volume of home appliances decreased by 6.8% year-on-year, with a certain narrowing of the decline compared to the first three months. In April, refrigerator production decreased by 15.8% year-on-year, washing machine production decreased by 15.8%, and air conditioner production decreased by 4.0%. In April, the export volume of home appliances decreased by 3.7% year-on-year.

From January to April, the year-on-year growth rate of the added value of industrial enterprises above designated size nationwide was 4.0%, down 2.5 percentage points from the first three months, indicating a slowdown in industrial production. However, the high-tech manufacturing industry maintained relatively rapid growth. In summary, except for the poor production and sales data of automobiles due to the epidemic, other manufacturing industries have been less impacted. The machinery industry has insufficient operation, related processing and manufacturing industries are operating poorly, terminal demand is slowing down, and sales pressure is relatively high. Steady growth measures are helping the industry's development. The overall inventory and production situation of the home appliance industry is not optimistic, and the main focus is on inventory digestion. There is still development potential under the stimulus of consumption measures. The automobile industry is facing weak supply and demand, and the government's policy of reducing purchase tax, stabilizing the industrial chain and supply chain, and expanding automobile consumption is driving upward expectations for steel consumption.

India restricts steel exports, increasing China's substitution demand.

On May 22, the Indian government adjusted import and export tariffs on steel raw materials and products. The export tariff on hot-rolled, cold-rolled, and coated steel coils with a width exceeding 600mm was increased from 0% to 15%. Export tariffs on pig iron, bars, wires, and some stainless steel varieties were also raised to varying degrees. According to the World Steel Association, India exported 17.1 million tons of steel in 2020, accounting for 4.5% of global steel trade, with export destinations covering Southeast Asia, Europe, and the Middle East. According to Eurofer, from January to November 2021, the EU imported 3.487 million tons of steel from India, accounting for 11.9% of its total imports, making India the EU's third-largest import source (the top five are Turkey, Russia, India, Ukraine, and South Korea). In March of this year, due to the Russia-Ukraine conflict, the EU banned steel imports from Russia and redistributed its quotas. India's quotas for hot-rolled and cold-rolled steel in the second quarter were 273,100 tons and 149,200 tons, respectively.

Raw material supply may marginally increase, and profits will shift to the smelting end.

Scrap steel

On May 27, 2022, the scrap steel price in Zhangjiagang was 3240 yuan/ton, a week-on-week decrease of 50 yuan/ton, and a year-on-year increase of 230 yuan/ton.

As a relatively stable price component in the black industry chain, scrap steel prices began to fall after May, the profit level of electric arc furnaces improved marginally, and it also suppressed the rise in iron ore prices.

Iron ore

On May 26, 2022, the Platts 62% index was $131.25/ton, a week-on-week increase of $1.85/ton, and a year-on-year increase of $131.25/ton.

On May 26, 2022, the total iron ore inventory was 134.538 million tons, a week-on-week decrease of 1.046 million tons, and a year-on-year increase of 9.432 million tons. Since the annual shipment volume of the four major mines remains unchanged, the supply may accelerate marginally in the second half of the year.

Coke

On May 26, 2022, the price of benchmark coke in Rizhao Port was 3210 yuan/ton, a week-on-week decrease of 200 yuan/ton, and a year-on-year increase of 220 yuan/ton.

On May 26, 2022, the capacity utilization rate of 230 coke plants was 81.70%, a week-on-week decrease of 1.01 percentage points, and a year-on-year decrease of 7.56 percentage points. The profit of coke plants was -247 yuan/ton, a week-on-week decrease of 201 yuan/ton, and a year-on-year decrease of 1164 yuan/ton.

Coking coal

On May 26, 2022, the Platts coking coal index was 419.00 yuan/ton, a week-on-week decrease of 23.00 yuan/ton, and a year-on-year increase of 144.00 yuan/ton. The total coking coal inventory was 23.2795 million tons, a week-on-week decrease of 650,900 tons, and a year-on-year decrease of 6.9404 million tons.

The reduction in crude steel has weakened market expectations for raw material demand. We believe that the current daily crude steel production level has approached the annual peak, and there is limited room for future raw material demand growth. From the supply side of raw materials, although the shipments of the three major overseas mines in the first quarter were lower than expected, this was mainly due to external factors, such as the rise in confirmed cases after Australia reopened its borders, which severely affected Rio Tinto's personnel operations; Vale experienced a significant decline in raw ore production, third-party procurement, and shipments due to heavy rains and delays in the approval of mining area operating permits, with the southern system being the most severely affected. However, in their quarterly reports, major mining companies maintained their annual shipment targets. In terms of shipment progress, Vale only completed 20% of its annual shipment target in the first quarter, while Rio Tinto only completed 22%, both lower than the same period last year. It is expected that the second and third quarters will see a peak in mine catch-up shipments, and iron ore supply will become more relaxed. With the decline in the cost-effectiveness of molten iron, the substitute demand for scrap steel will increase, squeezing the demand for furnace materials. Coupled with the decrease in total consumption due to production cuts, the pressure on steel mills' costs will be significantly alleviated, and profits will shift to the smelting end. According to model calculations, on May 26, the spot gross profits of rebar, hot-rolled coils, medium and thick plates, and cold-rolled coils were +166 yuan/ton, +106 yuan/ton, +125 yuan/ton, and +131 yuan/ton, respectively, an increase of +2 yuan/ton, +2 yuan/ton, +19 yuan/ton, and +11 yuan/ton compared to last week, confirming the view of rising industry profits.