Steel prices skyrocketed in the off-season. What happened?

Early today (9), the domestic futures market fell across the board, nickel, asphalt, ferrosilicon, Zheng coal, tin, etc. fell, glass, coking coal, rubber, rebar, coke, etc. fell more than 3%. Tuesday night, the black system collective heavy: coke, coking coal, power coal all fell, rebar far-month contract almost all fell.

Changjiang Securities analyst Wang Hetao said that the black system price correction, like a mirror. Regardless of the rise and fall, the black industry chain futures prices have always rushed in the first line.

According to China Merchants Securities, this round of rise is the longest and largest in the last five years. Put last Friday's prices with the level of the low point in December last year compared to see the comprehensive steel price index rose 14.9%, rebar rose 12.9%, hot rolled up 20.1%, plate rose 21.5%, galvanized rose 13.5%, cold plate rose 20%.

For this round of soaring steel prices, and even the entire black exuberance of the reasons behind the market, the major brokerage houses have different views.

IFC Securities analyst Yang pieces, steel prices are expected to rise the following points of internal logic: price increases have nothing to do with demand, the core is still replenishment of inventory.

The current point is still in the off-season, end demand has not yet started, demand is obviously not the reason for the price increase, only may be intermediate demand (traders replenish inventory) or supply. Replenishment of inventories depends fundamentally on expectations (expected increase - the cost of funds), therefore, one is the market bullish sentiment, the second is the abundance of funds (liquidity), and low inventories are amplified elasticity. Therefore, the futures drive billet and thus the spot. End demand is the latter two weeks to focus on.

Understanding the consequences of low inventories and long production cuts

The current inventory is seriously low: steel social inventory is down 20% year-on-year, Tangshan billet inventory is down 51.5% year-on-year, and steel mill inventory is also low. The industry has maintained a work rate of less than 77% for 9 consecutive months since the second half of 2015 (corresponding to the capacity utilization rate is expected to be less than 70%), which will inevitably lead to deep de-inventorying of the industrial chain, and replenishment of inventories by traders amplifies the gap.

Work rate PK peak season demand

Peak season demand intensity historically higher than the whole year at least 5-10 percentage points, the start rate if always maintained below 77% low, year-on-year demand changes in the assumption that the probability of peak season supply is less than demand, to support the price increase.

However, Changjiang Securities analyst Wang Hetao believes that, although a series of reform rhetoric, measures, etc. frequently, but the steel price trend is still my way, indicating that the supply-side reform is not the core reason for the current round of steel prices.

Replenishment is not the main reason. On the one hand, this round of price rebound from the earliest cold rolled, hot rolled, plate and other plate varieties, and price rebound so far, direct supply-based plate prices rose significantly more than the cumulative long, indicating that the plate is the protagonist of the round of steel prices, distribution accounted for a greater proportion of long since the beginning of the long material is in the follow-up that is the supporting role position. Circulation structure and the difference between the contrast between the rate of increase and decrease shows that the restocking is not the main reason.

In addition, since the end of the Spring Festival holiday on February 14, the steel trade link steel inventory year-on-year growth rate continued to decline, has not shown signs of the so-called intermediary inventory replenishment.

Wang Hetao said, demand improvement is the core reason for this round of price increases. In the post-holiday steel prices rebound stage, the industry chain in the upper reaches of steel inventory growth rate in the steel mills supply stabilized when the downstream demand is indeed improved. However, the sub-species point of view, although the demand for long plates have improved, but in this year's Spring Festival date compared to last year's advance, so that the effective construction time in February increased year-on-year, it is not yet certain that the seasonal factors affecting the greater demand for construction material is better than the seasonal factors.

For seasonal factors less affected by the plate, automobiles, home appliances and other downstream boom, is the main reason for the improvement in demand: (1) stimulated by the "passenger car purchase tax cut in half" policy, automobile production year-on-year growth rate at the end of last year, a significant rebound; (2) home appliance exports benefited from the depreciation of the renminbi in recent months has improved. At the same time, unlike real estate, because of the finished goods inventory to go relatively smooth, the demand side of the field of automotive appliances stimulus to the production side of the relatively smooth transmission.

Because everything originates from China's demand improvement, in the synchronized rebound in global commodity prices, black performance has always been the most eye-catching.

Although the supply adjustment lags behind the demand, the inventory is only the result of changes in demand, and can not change the direction, but can change the magnitude. Low supply and low inventory amplified the current round of steel prices rising elasticity.

Wang Hetao analysis, demand improvement triggered by the price rise is not no ceiling, especially in the current demand improvement is relatively limited (automotive / home appliances / heavy trucks and excavators, etc., its current low rebound in production and sales growth and high growth period are not comparable to that year), the sharp rise in the callback is not unexpected. In the short term, in the current plate demand stabilization trend remains unchanged, long steel demand is expected to improve demand has not yet need to be realized stage, prices are expected to continue to be strong, but need to be vigilant about steel mills due to profitability continues to turn good and resume production too quickly to the price of the supply-side pressure.

Throughout the year, in the two sessions to determine the "stable growth, adjust the structure" tone, only count on infrastructure and other financial stimulus to raise the probability of total steel demand is not great, and the steel industry capacity clearance is always a long way to go, it is expected that the black price pivot throughout the year is difficult to move up significantly.