On June 1, the reporter learned from the Steel Logistics Professional Committee of China Federation of Logistics & Purchasing (hereinafter referred to as CFLP) that although China's manufacturing PMI rose for the third consecutive month to 50.8% in May, the steel industry PMI index fell instead of rising, down 6.2 percentage points from the previous month.

CFLP believes that the steel industry PMI shows that the current overall situation of the domestic steel market is sluggish, with prominent supply-demand contradictions, unprecedented sales pressure on steel enterprises, and severely weakened cost support for steel prices. In addition, due to steel mill production cuts and maintenance, steel prices at historical lows have no room to fall further, and the downward space is limited.

Supply-demand contradictions remain prominent

On June 1, data disclosed by CFLP showed that the steel PMI index in May fell 6.2 percentage points from the previous month. The data also showed that since September last year, the steel industry PMI index reached the expansion range above 50% for the first time in April this year, and returned to the contraction range again in May.

In fact, the steel industry PMI index contracting again is related to the prominent supply-demand contradictions and high inventory pressure in the steel market in May.

CFLP pointed out that among the sub-indices of the steel industry PMI, the new orders index for the steel industry in May was 45.8%, a sharp drop of 12 percentage points from the previous month. After continuing to rise to the expansion range for the previous two months, it fell sharply back into the contraction range in May.

“This shows that under the situation of sharp steel price declines and tight funds, agents and end users are more cautious in placing orders with steel mills. The traditional agency system for steel sales is gradually dying out, and the sales pressure on steel enterprises has increased unprecedentedly,” Qiu Yuecheng, a senior researcher at Xiben New Line, told the reporter.

Data from the China Iron and Steel Association (CISA) show that in early May, the steel sales settlement volume of key statistical steel enterprises was 14.162 million tons, with an average daily sales of 1.416 million tons, down 28.9% from the average daily level of the previous ten days.

CFLP stated that under the situation of a sharp decline in investment growth and deep adjustment in the real estate industry, the improvement in domestic steel market demand in May was limited and still sluggish compared with the same period last year.

For the later period, CFLP believes that considering that East China will usher in the high-temperature plum rain season in June, terminal demand will shift to the traditional off-season for consumption, and downstream demand may weaken somewhat in June.

With downstream demand sluggish, steel enterprise inventories continue to be at high levels. CISA statistics on steel inventories of key steel enterprises show that by mid-May, the steel inventory of key statistical steel enterprises was 14.998 million tons, an increase of 700,000 tons or 4.9% from the previous ten days. Current steel enterprise inventories are still 1.317 million tons higher than the same period last year, an increase of 9.6%.

“The data show that destocking in the steel market is still ongoing. The loss of the reservoir function of steel traders has made the transfer of inventory pressure to steel enterprises more obvious, and the inventory pressure on steel enterprises has increased unprecedentedly,” Qiu Yuecheng believes.

Steel price downward space may be limited

Due to many bearish factors such as the continued economic downturn and banks tightening credit pervading the steel market, market confidence has become unbalanced, causing domestic steel prices to decline throughout May. However, CFLP believes that due to weakened cost support factors for steel prices and the expected reduction in crude steel output later, steel prices at historical lows have no room to fall further, and the downward space in the later period is limited.

Data show that in May, due to severe supply-demand contradictions and the sharp drop in ore prices, both futures and spot steel prices fell sharply to new lows.

As of May 30, the Xiben New Line steel index closed at 3,220 yuan/ton, down 140 yuan/ton from the end of the previous month, a month-on-month decline of 4.2% and a year-on-year decline of 4.17%, hitting a new low since October 2006.

The sharp decline in steel prices is largely related to the sharp drop in iron ore, a cost factor supporting steel prices in May.

According to the reporter's understanding, imported ore prices have experienced two rounds of decline this year. Among them, on March 10, the price of imported iron ore fell to $105/ton, down 22% from the beginning of the year, and then rebounded slightly; in mid-April, the price of imported iron ore fell again, and the decline accelerated in May. On May 30, the quotation fell to $91.5/ton, a cumulative decline of 32% from the beginning of the year, just one step away from the low of $88.5/ton on September 6, 2012.

“June coincides with the end of the second quarter and the end of the half-year. The funding pressure faced by steel mills cannot be underestimated. Affected by this, steel mills' raw material procurement will still tend to be cautious. The possibility of raw material prices continuing to weaken later is relatively high, and cost support will remain weak,” Qiu Yuecheng told the Daily Economic News reporter.

According to CISA statistics, domestic crude steel output has remained high this year. The national average daily crude steel output in February, March, and April was 2.217 million tons, 2.266 million tons, and 2.295 million tons, respectively, setting new historical highs for three consecutive months.

Starting from mid-to-late May, domestic steel mills have increased production cuts and maintenance under the situation of declining profits and the upcoming off-season for consumption, and the operating rate of steel mills has declined slightly.

According to CISA statistics, the average daily crude steel output of key steel enterprises in mid-May was 1.801 million tons, down 1.3% from the previous ten days. This is the first decline in output of key steel enterprises recently. It is expected that the national average daily crude steel output in May will fall slightly from the historical high in April, which can play a certain role in slowing the continued decline in steel prices.

CFLP stated that from the above situation, the current fundamentals of the domestic steel market remain sluggish, and the market pattern of “strong supply and weak demand” is still intensifying. Under the situation of tight funds and insufficient cost support, steel prices in the later period are unlikely to be optimistic. However, current domestic steel prices have fallen to historical lows. As steel prices continue to decline, market confidence has reached a bottom with no room to fall further, and the downward space for prices is limited.