In July, the black commodity sector embarked on a rally. Since July 1, the main contract for rebar futures has risen cumulatively by 7.46%, while the main contract for hot-rolled coil futures has climbed by 9.45%. The price of the rebar futures main contract has now reached its highest level in nearly a year, and the price of hot-rolled coil futures has hit its highest point for the entire year 2019.

From the perspective of basis, the rebar basis has been steadily narrowing and has now reached a relatively low level for the same period in previous years. The October contract has shifted from contango to spot premium since last week, meaning the downside room for the rebar basis is relatively smaller than that for the hot-rolled coil basis. Hot-rolled coil spot prices are slightly stronger than those of rebar, and the basis has remained at historically high levels, fluctuating repeatedly over the same period. If the basis eventually reverts toward its average level—and given expectations of a peak demand season—further gains in futures prices remain promising.

Judging from the price spreads on the futures market, the expectation of a rebound in steel demand after the end of the plum rain season has led to a pattern where near-month steel and iron ore contracts generally outperform their farther-month counterparts. The price spread between October and January contracts for threaded steel and hot-rolled coil both remain at historically high levels for this time of year. On the supply side, hot-rolled coil faces relatively less pressure compared to threaded steel, resulting in stronger performance of hot-rolled coil prices than threaded steel. As a result, the main contract price spread between hot-rolled coil and threaded steel has widened to 77 yuan per ton.

The synchronized rise in raw material and finished-product prices has provided mutual support at the cost level. As steel mills’ daily demand for scrap steel rebounds, the supply-demand balance for scrap steel is gradually tightening, driving scrap steel prices to remain firm and providing support for the continued upward shift in the price center of finished products.

Steel is in a state of high supply.

According to Mysteel data, as of August 6, rebar production stopped rising and began to decline, falling by 28,700 tons week-on-week to 3.8472 million tons. Both long-process and short-process production declined, yet remained at historically high levels. Hot-rolled coil production increased by 81,800 tons week-on-week to 3.3467 million tons. Hot-rolled coil output has remained near its historical average level. From a production perspective, the marginal supply risk for hot-rolled coils is lower than that for rebar.

According to data from Mysteel, as of August 7, the national blast furnace capacity utilization rate continued to rise month-on-month to 80.02%. The volume of blast furnaces undergoing maintenance and production restrictions nationwide declined to around 4.837 million tons. The average daily molten iron output from 247 steel plants across the country increased by 6,700 tons month-on-month to 2.5222 million tons. The operating rates of blast furnaces at steel plants nationwide have remained at their highest levels in nearly three years, and steel plant profitability has been steadily improving. Currently, the gross profit margins for long-process rebar and hot-rolled coils stand at 200–250 yuan per ton, while those for billets are between 150–200 yuan per ton. Profitability at long-process steel plants remains at a neutral level. With favorable profit margins, steel plants continue to maintain a relatively high level of production enthusiasm, thereby providing support for sustained high output of rebar.

Expectations for demand recovery are relatively optimistic.

In the first week of August, the average daily trading volume of mainstream building materials dealers nationwide reached 229,500 tons, an increase of 15,900 tons per day compared to the previous week's 213,600 tons per day. The calculated weekly apparent consumption of rebar also began to rebound, reaching 3.939 million tons. As the plum rain season in East China draws to a close, demand is showing signs of improvement, and year-on-year growth in apparent demand remains positive.

Although demand has been somewhat restrained by the impact of the pandemic, and recent heavy rainfall in East and South China has dampened short-term procurement, leading to a temporary decline in demand, the actual demand trend remains stronger than previously expected. Overall market sentiment remains optimistic regarding terminal demand during the post-plum rain season as well as the peak season of "Golden September and Silver October."

On the macro level, Ning Jizhe, Deputy Director of the National Development and Reform Commission, pointed out that in the second half of the year, we must firmly grasp the strategic pivot of expanding domestic demand. In terms of investment, we should prioritize the construction of “two new and one heavy” projects—new infrastructure, new urbanization, and major projects in transportation and water conservancy—while stepping up efforts to address shortcomings in areas such as public health, emergency supplies reserves, transportation, and energy. We should also accelerate the renovation of old residential communities in urban areas.

Inventory accumulation is finally showing signs of a turning point; high inventory levels conceal marginal risks.

According to Mysteel data, as of August 7, social inventories of rebar in 35 cities fell by 13,700 tons week-on-week to 8.5934 million tons, a decrease of 0.75%, ending six consecutive weeks of inventory accumulation. Steel mill inventories ended their two-week rise, falling by 78,100 tons week-on-week to 3.4927 million tons, a decline of 2.19%. Total rebar inventories also ended their sustained accumulation, dropping by 0.75% week-on-week. For hot-rolled coil, social inventories in 33 cities rose by 44,200 tons week-on-week to 2.807 million tons; steel mill inventories of hot-rolled coil increased by 2,400 tons week-on-week to 1.1202 million tons; and total hot-rolled coil inventories, after 15 consecutive weeks of decline, saw their seventh straight week of accumulation, rising by 46,600 tons week-on-week.

The output of threaded steel, social inventories, and steel mill inventories have all declined simultaneously. Coupled with the market’s optimistic expectations for demand following the plum rain season, the overall supply-demand structure has improved, providing support for steel prices. However, spot inventories of steel products remain relatively high, and with production levels still at elevated levels, marginal risks to steel prices persist.

Currently, the overall supply-and-demand structure in the steel market has improved. Although high supply levels persist and lack significant elasticity, steel demand has proven to be more resilient. Consequently, expectations and actual strength of end-user demand have become the key factors determining steel price trends. The recovery phase of demand has yet to fully materialize; however, market expectations for peak-season demand during “Golden September and Silver October,” coupled with ongoing macroeconomic support for infrastructure investment, will continue to underpin steel prices, allowing us to adopt a cautiously optimistic outlook for August steel prices. Nevertheless, recent volatile weather conditions have led to a temporary decline in demand, and combined with some recent macroeconomic disruptions, steel prices may now experience fluctuating consolidation.