Steel inventories continue to rise, and downstream demand has not changed.

The latest cisa production data show that in early march, cisa key statistics steel enterprises steel inventory of 21.4087 million tons, 923,900 tons more than the last ten days, an increase of 4.51%; That was 11.8762 million tons, or 124.59 percent, more than at the beginning of the year.

Wang yi (not his real name), a senior official at a large private steel company, told the economic observer on March 19, "in February, we produced 420,000 tons of communist steel and 15,000 tons a day. Now the daily steel production is around 17,000 tons, which is rising."

Inventory growth has slowed but has not yet peaked. Experts expect overall inventories to peak by the end of march.

The biggest headache for steelmakers is the huge inventories and demand that has yet to be unleashed. At present, enterprises need to pay a variety of costs and to bear the capital risk is huge. Driven by interests (even a small profit), there are not many steel enterprises actively reduce production, on the contrary, the feedback from the market shows that inventories are still growing.

China iron and steel industry association from a voice: to get out of trouble, should take the initiative to cut production to save themselves. But almost everyone in the industry understands that it is difficult for steel companies to act in this way, and the steel market is far from bottomed out as a result of the covid-19 outbreak.

Luo tiejun, vice chairman of the China iron and steel association, said that the current steel industry consumption decline, the steel inventory rises sharply, the enterprise capital side is relatively tight, the market pressure is greater. Hope the enterprise organizes production according to the order, reasonable control the production rhythm.

Huge increase in inventories

At present, the steel market is faced with the situation that the upstream supply continues to increase, the downstream demand is sluggish, the inventory destocking speed is slow, and the contradiction between supply and demand is further aggravated.

On the supply side, steel mills do not appear to be taking the initiative to cut production. In early march, the key statistics of cisa showed that steel enterprises produced 16.7664 million tons of steel, with an average daily production of 1.6766 million tons of steel, an increase of 6.46% month-on-month and 1.11% year-on-year. According to the key statistics of steel enterprises production estimates, in the middle of the country's daily production of crude steel, pig iron, steel, although the month-on-month flat or slightly decreased, but year-on-year growth.

Survey data showed that in the first two weeks of march, the average bf operating rate of 100 small and medium-sized steel enterprises in China was 77.3%, up 1.5% from February.

If steel mills fully resume production, there is a good chance that the oversupply situation will not change for at least the next month, even if demand starts faster than expected.

Liang wujian, a senior analyst at zhuogang black research institute, said, "it is estimated that the steel inventory at the end of February will be enough to sustain normal downstream production for a month. Many people who have been in the business for decades have never seen such a large inventory. It's a lot of pressure."

According to cisa data, in early march key statistics steel enterprises steel inventory of 21.4087 million tons, 11.8762 million tons more than the beginning of the year, an increase of 124.59%.

Steel enterprises to stop production maintenance ratio is not large. Up to now, nearly 30 steel enterprises have cut production for maintenance and repair, among which the average daily output of rebar is reduced by 13,600 tons. Every year before and after the Spring Festival, steel enterprises maintenance is a required action. But it will also be delayed because of market changes.

On the demand side there is a massive contraction.

"The inventory is up 40 to 50 percent from the same period last year, but the market demand is still very small."

Analysts who have long been involved in steel research told the economic observer that domestic demand for rebar steel in the first quarter of this year is expected to shrink by 25-35 per cent year on year, while international demand is expected to shrink by 27 per cent.

Why are inventories still rising

Supply and demand are finding a balance in the game.

"There is still a battle going on between the supply and demand sides. Demand has not picked up at all, but supply will soon pick up again." "The operating rate of electric steel is low enough now, probably less than 30 percent. If the scrap can be recycled and the workers are in place, the production of electric steel will soon be up.

"If the operating rate of the electric furnace steel enterprise is restored to 50%, it will be more severe. Now everyone is looking for a change in demand." Zeng said.

Some market research pointed out that as of March 16, the actual resumption of work rate of downstream construction projects reached more than 70%, but the huge inventory still needs time to be digested, and the situation is not optimistic. "if the steel mills take the initiative to reduce production, part of the supply pressure can be alleviated to some extent."

However, according to data from Mysteel, the weekly production of hot coil mills is still at a high of 3.1644 million tons, which is basically the same as the same period in 2019 and higher than the same period in 2018. This means that steel enterprises are not willing to reduce production. "As long as there are profits, steelmakers will not cut production. "Even if we cut production, it will be difficult to offset the reduction in demand." Above - mentioned market personage analysis.

At the current steel price level, there is enough profit to drive the long process steel production at full capacity. According to the analysis, the general long process rolling mill, rebar steel production cost within 3400 yuan/ton, the average cost level of about 3300 yuan/ton.

On March 18, the average price of 20mm third-class rebar steel in 25 major cities nationwide was 3,677 yuan/ton, an increase of 7 yuan/ton over the previous trading day.

'recently, many steel traders have been pouring their goods to each other and to the construction sites, but the volume is very small,' Mr. Wang said. New orders are still small. Downstream enterprises in accordance with their own pace of procurement, the overall sustainability of the need to test.

The impact on the industry is beyond imagination.

This has also led to a drop in China's steel exports. China exported 7.811 million tons of steel in the first two months of this year, down 27 percent year on year and the fastest rate of decline since March 2018, according to data released by the general administration of customs. Market participants predict that the situation of China's steel exports in 2020 is still not optimistic.

On March 17, the ministry of finance and the state administration of taxation issued a notice to raise the export tax rebate rate of some products, and the export tax rebate rate of some steel products, such as coated steel and stainless steel, was raised to 13%. This will have a certain stimulating effect on the formation of positive steel exports.

But there are also market participants do not expect too much. The reason is that the spread of the overseas epidemic has had a significant negative impact on the global economy and finance, which will be a drag on steel demand. China's steel exports are expected to remain under great pressure in March.

Risks intensified in April

In the coming April, the steel industry faces the risk of high inventories.

Recently, affected by the epidemic, the global financial market is in turmoil, and most of the bulk metal commodities are doomed to fall. Even gold, which has a hedging property, is not immune due to liquidity and deflation expectations. However, rebar steel stands out, which is derided as "threaded gold" by the market.

On March 18, a steel enterprise personage told the economic observer that rebar steel has so strong, but is expected effect, everybody to the future market expectation is very good.

According to the analysis of the steel enterprise, after the effective control of the epidemic in China, except hubei and some other provinces, the rate of resumption of work in other parts of the country has exceeded 90%. Investors expect steady growth and employment. The country will surely make efforts in major infrastructure projects, and even in the real estate sector. A series of positive factors, including fiscal and monetary policies, business deadlines and the release of consumption, are expected to boost the rebound of the economy.

The mood among market participants is that the downstream is recovering and future demand is fine. With such optimistic expectations, they have turned a blind eye to huge inventories and seem confident enough to support both thread strength and futures premiums.

In zeng's view, the epidemic may have a smaller impact on steel demand for the whole year, but the risk of total demand falling short of expectations should also be prevented. After all, black department of commodities in the current environment supply and demand fundamentals will not be too good.

'in March, steel companies gradually reversed their losses in February, but the room for profit is still small,' the person said. March 18, construction steel futures high open low, the market has improved, but still difficult to have the actual volume of transactions to support the high price.

Zeng jiesheng thinks, the market risk will be bigger in April, the contradiction between supply and demand is likely to erupt. "Steel prices are likely to fall significantly in April and downstream demand will not really pick up until may." There will be a correction in the market."

The recovery has yet to come. The current difficulties are more focused on capital, including the high cost of iron ore and other raw materials, comprehensive cost pressure.

The digestion of real inventory has become the biggest problem faced by steel enterprises and traders. And finished material inventory is too high, also mean occupy capital proportion is too big, its capital pressure is bigger and bigger also. In particular, the end of march winter storage settlement period will come.

'the steel industry is facing a comprehensive problem,' said a statement issued by the all-china metallurgical chamber of commerce on March 13. First, the contradiction between supply and demand is further intensified; second, the problem of capital.

According to the prediction of quanlian metallurgy chamber of commerce, the loan demand of the whole industry is 1.7 trillion yuan, while now it is about 1.1 trillion yuan. Most private enterprises' loan difficulties have not improved substantially, and the average meeting rate is only about half. At present, due to the substantial increase in inventory, the pressure of more than 200 billion yuan, exacerbating the financial difficulties of enterprises.

The analysis said, "many private steel enterprises in the financial institutions loans financing is not so easy, or the relative cost will be much higher than others. They are anxious, along with traders and companies up and down the industry chain, because of high inventories and capital constraints."

Recently, the iron ore index price rose about 15 percent and remained at a high level, increasing the volatility.

Luo tiejun, vice chairman of the China iron and steel association (cisa), said in an interview with reporters on March 15 that the current trend of the iron ore index is clearly deviated from the fundamentals of supply and demand and the spot market. In the process of compiling the spot price index, the index institutions should be based on the actual transaction price of the spot market and be free from the influence of financial derivatives such as futures and swaps. Mines should "discover prices", not "create prices", through transactions in the third-party spot market.

These difficulties have also made the industry see the complex situation faced by China's steel market under the impact of the epidemic.

However, there has been some good news from steel companies recently: angang, shagang, liugang and chonggang will get medium - and long-term financing of nearly 50 billion yuan by issuing bills, obtaining credit or loans from Banks and other measures.

The biggest hope for steelmakers is that downstream demand, which has been delayed for more than a month, will actually start and return to normal levels in the past, but that is highly uncertain.

'it is likely that the situation we will face in April will be even more severe than expected,' Mr. Wang said.

Expectations are grim

The market player said that even without considering the impact of the epidemic, the macroeconomic operation in 2020 itself will be supported by infrastructure. This year, the economic growth driven by the real estate construction cycle and the commencement of construction will fade, and the completion of the annual economic and social development target will have to rely on infrastructure construction to achieve.

Li qilin, chief economist at yuekai securities, said that if there is no impact from the epidemic, only considering a mild slowdown in real estate investment to 5% to 10%, maintaining a 6.1% growth rate for the whole year would require about 8% infrastructure investment. Under the impact of the epidemic, if the annual growth rate of 6.1% is to be maintained for the whole year, the corresponding GDP growth rate should be at least above 6.5%, and the corresponding infrastructure investment growth rate should be above 15%.

Mr. Zeng agrees that infrastructure is the only way to save the market this year, but last year many local governments' finances were strained, and tax cuts and fees meant some investment projects couldn't keep up. Downstream construction sites are more of the early projects, the new project is less.

At present, local governments are also facing the pressure of financial budget, which requires further financing support to start the infrastructure construction.

International situation change is the important factor that disturbs Chinese steel market. Recently, the epidemic has spread abroad, the stock market has fallen sharply, and the domestic and foreign financial markets remain unstable. Transmission to the domestic futures market volatility increased, steel market participants still not sound mentality.

Market participants are concerned that the global slowdown, in turn, will have a knock-on effect on the domestic economy and reduce foreign investment in China. If the rest of the world's steel supply chains are disrupted, demand will shrink further.

Li believes that the uncertainty of external demand will depress the real return rate, which will affect investment. Even if China can afford a massive stimulus, the spread of the epidemic will severely weaken the spillover effect of its stimulus on global growth.

The people's bank of China has decided to cut the reserve requirement ratio in a targeted way on March 16, freeing up 550 billion yuan of long-term funds to hedge against panic in the peripheral market.

In fact, the steel market doesn't have much to do with U.S. stocks, but it does have a lot to do with international crude oil prices, the person said. Every time the international crude oil price falls sharply, steel price sooner or later will appear a significant correction. International crude oil prices reflect changes in the capital market's expectations of the global economy. Crude oil is also more closely linked to the dollar index, which has fallen for supply-side reasons, but more because of the decline in demand caused by the epidemic.

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