Review: Steel prices followed a "spoon"-shaped trend in the first three quarters

　　The absence of the "Golden March, Silver April" peak season sent steel prices, full of promise, tumbling from after the Spring Festival all the way to the end of June, with some steel grades falling by more than 700 yuan/ton. Then, with the implementation of a series of "mini-stimulus, floor-protection" policy measures, the steel market staged a counter-trend rebound amid the hot summer, letting the market experience what it means to be "unexpectedly" surprised. After months of deep declines, steel prices enjoyed an unexpected "rise first, then stabilize" in July and August. As prices rebounded, steel mills' profitability began to recover modestly from July. In the off-season for demand, production enthusiasm remained relatively high, and hopes were once again pinned on the "Golden September, Silver October" that had caused so much pain last year. Unfortunately, although China's economic fundamentals continued to improve, the anticipated "Golden September" peak season once again shyly failed to materialize. Although there was no historic "Waterloo," the market still took a considerable hit.

　　Crude steel output repeatedly hits new highs

　　In the first three quarters of this year, steel mills' production enthusiasm remained at a high level, with average daily output above 2.1 million tons. Particularly when steel prices were falling continuously earlier on, mills fell into the strange cycle of "producing more the more they lost."

　　In the first three quarters, the highest daily average crude steel output occurred in early May, reaching 2.1929 million tons, while the relative low was 1.9058 million tons in late January, a gap of nearly 300,000 tons. As of the end of August, based on China Iron and Steel Association data, average daily crude steel output stood at 2.0873 million tons, far above last year's average.

　　Market enters a destocking phase lasting more than six months

　　With mills producing continuously at high levels, around mid-to-late March China's social inventory of steel reached the highest level since statistics began, at 22.3452 million tons. Only then did an extraordinarily long destocking phase of more than six months begin, ending in early mid-September, when social steel inventory fell back to a normal level of about 14.61 million tons.

　　After late March, as downstream industries gradually resumed production, China's steel sector, having completed inventory rebuilding, entered a new destocking phase. After 26 weeks of inventory declines, cumulative destocking reached about 39% by mid-September. Inventory of key steel varieties nationwide fell by 958,500 tons more than the same period last year, showing destocking was notably faster than a year earlier.

　　Raw material costs fluctuate, strong first then weak

　　In the first three quarters, major steel raw material markets such as imported ore and billet maintained wide fluctuations. Early in the year, boosted by stronger expectations for Chinese steel demand, imported ore prices continued to rebound; the price of 62% Australian ore rose to a known high for the year of $159/ton in mid-February. Subsequently, as steel prices kept falling, imported ore and other raw material prices also remained weak, dropping to a low of $110/ton in early June. But during the subsequent summer counter-trend rebound in steel prices, imported ore rose again. Although it has been fluctuating downward since September, it currently stands at around $140/ton, so cost support for spot steel prices remains reasonably solid.

　　Forecast analysis: Steel market to recover moderately in Q4

　　Although September has not yet ended, judging from current trends in the steel market, a positive outcome is unlikely, and a failed Golden September is now inevitable. As for the upcoming fourth quarter, we believe a "weak first, strong later, narrow fluctuation" pattern is the most likely scenario. The author believes the following changes are worth considering.

　　Mills' production enthusiasm undiminished; supply-demand conflict relatively weak

　　According to the latest statistics from the National Bureau of Statistics, China's crude steel output in January-August 2013 was 521.84 million tons, up 7.8% year on year. August crude steel output was 62.28 million tons, with average daily output of 2.13 million tons, rising again after three months and reflecting stronger production enthusiasm among mills.

　　Since March this year, China's steel output has consistently remained above 2 million tons, indicating that steel enterprises have no intention of cutting production. Starting with the National People's Congress and the Chinese People's Political Consultative Conference, the state has raised air pollution control to a new level, issuing three lists of outdated capacity to be eliminated, and an overall plan for eliminating outdated capacity is being intensively formulated. In particular, the "Air Pollution Prevention and Control Action Plan" released in mid-September set out detailed treatment standards. This year, the state's determination regarding environmental protection, energy conservation and emission reduction, and elimination of outdated capacity has grown steadily. For now, however, the actual effect is quite limited, and how it will affect steel output later remains to be seen. What is indisputable is that although steel output has remained high, China's social steel inventory is far below the same period last year, reflecting a gradual increase in steel consumption capacity this year, especially since summer. New projects will still be numerous later, and various growth-stabilization measures continue to be implemented, so overall steel demand is relatively stable and unlikely to change much. Overall, supply pressure is not great.

　　Transport and real estate investment gain momentum; downstream steel demand outlook favorable

　　Although spot market transactions have not performed well this year, crude steel output repeatedly hitting new highs upstream, combined with steel inventory far below last year's level, most intuitively reflects that China's end-use steel demand is considerable.

　　Looking at downstream industries, although shipbuilding, home appliances and other sectors remain sluggish, railway construction investment is accelerating, shantytown renovation is being stepped up, urban infrastructure investment is being strengthened, real estate investment is improving in the second half, and the automotive and machinery manufacturing sectors are performing very well. At mid-year, in order to keep economic growth above the floor and accelerate the absorption of overcapacity in steel and other industries, the state announced a series of major mini-stimulus projects, including significantly strengthening railway construction in central and western China. These directly drove the counter-trend rebound in steel prices in July and August this year, creating a miracle of an off-season that was not off-season. Overall, China's steel demand is very stable, and there is no need to worry in the coming fourth quarter.

　　Prices of imported ore and other raw materials may continue to fall

　　Earlier this year, imported ore rose to nearly $160/ton at its peak, then after a prolonged decline pulled up again in July. By mid-to-late September, the price of 62% Australian ore fluctuated around $135-142/ton, relatively firm. Clearly, the trend of imported ore and other major raw materials is now facing a directional choice, with no clear trend yet.

　　Although current Chinese demand strongly supports iron ore prices, it should be noted that global iron ore supply is growing significantly faster than China's iron ore consumption. Reports indicate that starting in the fourth quarter this year, new capacity from overseas miners such as Rio Tinto, BHP Billiton and FMG will begin to be released. Figures show that major overseas mines will add about 60 million tons of iron ore output, and supply pressure will increase markedly later. On the other hand, China's environmental governance is becoming increasingly strict, with detailed treatment requirements even set for high-pollution industries such as steel. Therefore, although mills' production enthusiasm remains undiminished, if policies are strictly enforced, domestic steel enterprises' demand for iron ore will certainly decline later. Thus, there is considerable downside room for prices of imported ore and other major raw materials within the year.

　　Viewpoint: Based on the above analysis of steel supply, demand and raw material costs, we can broadly judge that the steel market in the fourth quarter will overall be stronger than in the first half, but whether it can reach the heights of the third quarter still depends on future developments in liquidity and new urbanization construction. On balance, we believe that after the National Day holiday, the domestic steel market is likely to be weak first and strong later, moving in a band-like pattern.