Trend Continues, Drivers Switch—Steel Price Rally Continues, Cost Push Fades and Turns to Fundamentals Verification

(Source: Ganglian HuiNeng Academy)

Last week, black series commodities surged to a temporary peak driven by energy price increases caused by geopolitical conflicts. As concerns over crude oil supply eased, the cost-driven rally subsided, and the market’s main trading focus will return to the fundamentals of steel itself. Currently, seasonal demand has not been disproven, and the market remains in a seasonal recovery channel. Steel prices have solid support at the bottom, making the black series overall prone to rise and difficult to fall. However, in the short term, steel supply pressure is about to rebound, and with marginal weakening of supply and demand fundamentals, steel prices are expected to enter a high-level consolidation phase.

1. Geopolitical shocks dominate cost-driven increases; improved supply-demand in plate products supports last week’s steel price rise

2. External geopolitical events push costs higher: Over the past weekend, Middle East conflicts escalated unexpectedly, raising concerns about crude oil supply contraction, causing energy prices to rise rapidly. This sentiment spilled over into coking coal, boosting its prices and providing upward momentum for the black series from the cost side.

3. Temporary alleviation of supply pressure restores market expectations: Due to environmental restrictions in northern China, many steel mills, led by North China plate producers, focused on self-imposed emission reductions, causing ironmaking output to accelerate decline last week. Mysteel data shows that the daily average pig iron production of 247 steel mills fell by 64,000 tons to 2.212 million tons, a new low this year. The rapid contraction in supply led to a first inventory reduction point after the Spring Festival for plate products, easing fundamental contradictions, restoring market expectations, and slightly boosting steel prices.

4. The upward logic remains but faces short-term pressure: demand in the peak season has not been disproven, and price correction space is limited

Currently, the substantive validation of peak season demand has not yet materialized, and steel price support remains firm; specifically:

1. Seasonal inventory reduction is about to begin: Historically, the five major steel products tend to see a trend of inventory reduction around the fourth week after the Spring Festival. Demand for finished steel remains in a seasonal upward channel, with further recovery potential.

2. Downstream demand remains resilient: Orders and funding for downstream industries have not worsened. Mysteel surveys show that manufacturing and construction sectors’ post-holiday orders have improved as expected, and the issuance of new special bonds in Q1 has accelerated year-on-year, supporting the high demand in the upcoming peak season. Until demand actually materializes at the end of March, market confidence at the bottom will be hard to completely break.

However, in the short term, the core logic supporting price increases is loosening, and the momentum for further rises is insufficient, with potential high-level corrections. This mainly stems from three aspects:

1. Cost support weakens; trading focus returns to fundamentals

As the US signals efforts to end conflicts and OPEC and other agencies indicate plans to increase production to fill supply gaps, expectations of escalation in geopolitical conflicts and crude oil supply concerns have cooled. This means the previous energy-driven rally in coking coal and black series has largely played out, and cost-driven upward momentum will significantly weaken. Market trading will fully revert to the supply and demand fundamentals of steel.

2. Supply pressure is about to rebound; inventory reduction sustainability is doubtful

Last week’s sharp decline in pig iron output was mainly due to timing mismatches in statistics, not actual production plans. Steel mills are about to resume production: Mysteel surveys show that as environmental controls in the North weaken, many mills resumed production in mid-March. It is expected that from this week, daily pig iron output will quickly recover, likely rebounding to around 2.3 million tons in the next two weeks. Inventory accumulation doubts persist: last week’s inventory reduction for plate products was mainly driven by temporary supply contraction, not demand explosion. As production rapidly rebounds this week, if demand does not significantly improve, inventory pressure may re-emerge, intensifying market concerns.

3. Domestic and external demand recovery falls short of expectations; market sentiment becomes cautious

Domestic demand remains sluggish: post-holiday, plate product consumption recovery has been slow, with weekly YoY growth negative for three consecutive weeks, weakening optimism about peak season demand. External demand declines: on one hand, Middle East conflicts hinder steel exports to that region; although exporters shift to Southeast Asia, the volume cannot fully offset reductions. On the other hand, some Middle Eastern and South Asian countries enter Ramadan, causing seasonal procurement slowdown. Mysteel surveys show that since mid-March, new export orders have marginally weakened, reducing external demand’s price-driving effect.

The black series has shifted from “cost-driven rally” to “fundamentals validation” stage. The overall upward logic remains, but short-term high-level consolidation pressure exists. Based on the relative strength of different varieties, it is recommended to focus on structural opportunities in basis and month spreads:

1. Hot-rolled coil futures-spot basis has room to widen: As of March 12, the Shanghai hot-rolled coil futures-spot basis was about -15 yuan/ton, below the annual average (-5 yuan/ton), with about 127 yuan/ton upside to last year’s high. With weakening export expectations and faster price fluctuations in futures than spot, further futures rally could provide opportunities for basis repair at low levels.

2. The month spread between Iron Ore Contract 05-09 has structural expansion potential: As of March 12, the spread was 29 yuan/ton, near a multi-year low. With mills resuming production intensively from this week, pig iron entering a trend of rising, and supply-demand expectations strengthening, combined with external factors like a strong US dollar supporting near-month prices, the near-far month spread is likely to widen.

Rebar: Last week, geopolitical conflicts continued to push up crude oil and raw material prices, with rebar prices continuing to rise at the bottom. Marginal fundamental improvements also provided some support. As demand accelerates, the weekly inventory accumulation rate for rebar small samples narrowed significantly from 9.4% to 2.1%, the lowest in the past five years. The Shanghai rebar * spot average price rose by 34 yuan/ton week-on-week to 3,224 yuan/ton.

From demand perspective, construction is transitioning from post-holiday startup to normal operation, with regional differences evident. According to the “Century Construction” third phase nationwide construction resumption data, the overall resumption rate decreased by 5.2 percentage points YoY; labor and funding arrival rates fell by 5.8 and 0.8 percentage points respectively, indicating demand is recovering but not yet fully and smoothly transmitted. Behind this are two main reasons: first, capital stratification remains prominent. Due to debt pressures, slow receivables, and reluctance to prepay, only provincial special bonds and key livelihood projects have strong start-up momentum; second, northern regions are still affected by low temperatures, frozen soil, and phased environmental restrictions, resulting in slower resumption than previous years. Overall, demand is not lacking but characterized by “key projects leading, regional pacing mismatch, and layered funding support.” Faster resumption in East and South China, with accelerating construction in Central China, while Northwest, Northeast, and some districts still await better funding or weather conditions. It is expected that this week, the demand for rebar will further rebound to around 1.9 million tons.

Funding remains a key variable for future demand strength. As of March 15, the issuance of new special bonds in March was only 30.5% of the planned amount; if subsequent issuance proceeds as scheduled, total issuance by month-end will still increase by 18.6% YoY, with about 81% allocated to project construction, reflecting proactive efforts. However, fund deployment remains uneven, mainly flowing into key projects and state-owned enterprises; supporting projects at district levels and those with slow receivables still lag, and demand recovery depends on the actual implementation of subsequent bond issuance.

On the supply side, after last week’s electric furnace resumption, rebar short-process output rose to 290,000 tons, with electric arc furnace start-up rate and capacity utilization significantly improving. However, due to low profit margins, most mills are still operating below full capacity. Currently, arc furnace enterprises are generally in loss zones; only some maintain about 20 yuan/ton marginal profit under off-peak power conditions, mainly producing to avoid peak periods. Even if full resumption occurs later, industry average profits may further decline. For long-process mills, although steel mill inventories stopped rising and declined last week, YoY levels remain high, and blast furnace profits have not improved significantly. Mysteel estimates that the spot rebar profit in Jiangsu remains at a loss of about 20 yuan/ton. Given that demand recovery is mainly seasonal, mills generally adopt a “production based on sales” strategy, remaining cautious about expanding capacity. It is expected that this week, small-sample rebar output will increase by 47,000 tons to around 2 million tons.

Overall, rebar production growth will gradually slow over the next three weeks, while demand still has room for further improvement. Inventory is expected to reach a turning point for reduction in late March, with fundamental contradictions not prominent, leaving some room for price recovery. However, in the short term, raw material price fluctuations and the transition into the spring consumption validation phase will influence trading. If the pace of inventory reduction falls short of expectations, upward pressure will increase. Additionally, high inventory pressure in Hangzhou continues to weigh on the East China spot market.

Hot-rolled coil: Last week, the Shanghai hot-rolled coil * spot average price was 3,260 yuan/ton, up 28 yuan/ton week-on-week.

Last week, the hot-rolled coil market shifted from cost-driven rally to fundamental validation. Supply contraction led to a turning point in inventory reduction, but demand recovery remained weaker than in recent years, with the speed of inventory reduction (0.02%) below the five-year average.

Geopolitical conflicts in the Middle East drove steel prices higher last week. Mysteel surveys show that North China’s hot-rolled coil production turned profitable, with profit per ton reaching about 5 yuan, which will drive supply to rebound. As environmental restrictions gradually ease, northern mills are expected to resume production sequentially, pushing output upward. This means the current inventory reduction driven by supply contraction faces a test; if demand does not significantly improve, inventory pressure may re-emerge.

Demand recovery remains slow: post-holiday, plate product consumption has been sluggish, with weekly YoY growth negative for three consecutive weeks, weakening market optimism. External demand is also affected: Middle East conflicts hinder exports, despite exporters shifting to Southeast Asia and South America, the volume cannot fully offset reductions. Additionally, approaching Ramadan causes seasonal procurement slowdown. Mysteel surveys show that since mid-March, new export orders have marginally weakened.

Overall, the hot-rolled coil market is entering a “fundamentals validation” stage. Peak season demand has not been disproven; demand remains in a seasonal upward channel, with no deterioration in downstream orders and funding. Market confidence at the bottom remains firm, and prices have limited downside. However, with marginal weakening of supply and demand, inventory is expected to stay in a weak equilibrium, and prices may face high-level consolidation.

Iron ore: Last week, driven by rising crude oil and US dollar index, and rumors of trade restrictions on some domestic ores, Qingdao port PB fines* prices surged to 800 yuan/ton, with the 62% Australian ore index rising to $110, the highest in nearly 20 months.

Prices surged briefly but face technical correction risks. Nonetheless, crude oil issues remain unresolved, and domestic production and demand are recovering, so the upward trend in ore prices has not ended.

Despite port inventories reaching a record high of 179 million tons, port congestion and ongoing destocking at steel mills have reduced total inventories by 5.75 million tons over the past three weeks. As pig iron output and arrivals at ports stabilize, total inventories are expected to decline further. Additionally, the ongoing Israel-Palestine conflict shows no signs of ending, supporting high crude oil and US dollar levels to underpin ore prices.

Coking coal and coke: Last week, coking coal and coke futures prices rose, with spot prices remaining stable. Port Grade-1 coke* at 1,472 yuan/ton remains unchanged; Linfen low-sulfur main coking coal* averaged 1,456 yuan/ton, down 68 yuan/ton week-on-week.

Since last week, ongoing geopolitical conflicts have driven crude oil and coal futures prices higher. Given the macro environment’s continued uncertainty, short-term support for coking coal and coke prices is expected to persist.

In addition, recent sentiment-driven recovery has improved fundamentals, especially inventory structure: raw material inventory days for coke and steel mills stopped declining and turned up YoY earlier than expected. Although this is partly due to larger pig iron reductions, spot transactions for coking coal and coke have improved, and inventories are gradually shifting downstream.

Under current macro conditions, coking coal and coke futures remain relatively strong, with pig iron approaching a bottom-up trend supported by raw material demand. However, downstream profit margins are shrinking, and the overall oversupply of carbon elements limits price increases. It is expected that spot prices for coking coal and coke will gradually rebound slightly in the near term, but a full-scale rally is unlikely for now.

Note: The * symbols in the text represent prices for the following specifications (all prices include tax except scrap steel):

Rebar: Shanghai Rebar HRB400E 20mm

Hot-rolled coil: Shanghai Q235B 4.751500C

Iron ore: Qingdao port PB fines (tax-included wet ton price)

Scrap steel: Zhangjiagang heavy scrap (thickness ≥6mm)

Coke: Rizhao port Grade-1 out-of-stock

Coking coal: Linfen low-sulfur main coking coal

Editor: Chen Wenzhi 18917343189