Optimistic expectations support steel prices running high

In the second quarter of this year, with the resumption of work and production, the domestic economy showed a relatively good momentum of recovery, the industrial recovery speed is relatively fast, the price of industrial products steadily picked up, the price of rebar oscillated upward, rising by nearly 10%.Current steel society inventory level is higher than in previous years, steel production remains high, but in the off-season period the price did not adjust, but accelerated the pace of rise.The author believes that the recent price is dominated by expectations, macro factors have a greater impact, and optimistic market expectations provide a strong support for steel prices.

On the whole, the macro economy has recovered steadily and the fundamentals have continued to improve.The manufacturing PMI came in at 50.9 per cent in June, up from 0.3 percentage points the previous month, with two-thirds of the 21 sectors surveyed above the critical point, up five from the previous month.Itemized data show that both ends of supply and demand continue to pick up, the price index has risen, and business confidence is basically stable.However, due to the severe situation of the epidemic overseas, uncertainties still exist. Although the import and export index has improved for two consecutive months, it is still below the critical point, and there are still uncertainties in the external market.Since the outbreak of coVID-19, the central bank has adopted the monetary policy of "wide currency + wide credit" to deal with the adverse impact of the complex situation at home and abroad.In the first half of this year, bank loans and social finance increased by a record 12.09 trillion yuan and 20.83 trillion yuan, respectively. M2 has remained above 11% year-on-year for three consecutive months.The policy of "wide money + wide credit" has provided favorable conditions for the price rise of risky assets such as the stock market and industrial products.

A review of several representative price trends of industrial products since the beginning of this year shows that steel prices have been least affected by coVID-19. This is because the supply and consumption of steel are dominated by the domestic market, and proper epidemic control measures in China have little impact on the production of steel mills and the resumption of downstream work.In addition, the impact of the epidemic on the economy has instead raised the market's expectation of the country's policy of expanding the scale of infrastructure construction and relaxing the regulation of real estate. No matter the upstream steel mills or the midrange traders and end-consumer enterprises, they remain relatively optimistic about the price of steel this year.Due to the flexible and appropriate monetary policy adopted by the state, steel mills, state-owned traders and construction units all indicated that financing costs had decreased significantly and funds were relatively abundant, which undoubtedly improved the risk preference and anti-risk ability of enterprises.Despite the expectation of demand decline and social inventory accumulation in July and August, steel traders did not panic because of this. Instead, they hoped to build more inventories in the low season correction process of steel prices to gain greater profits in the future.The rapid rise of the stock market has stimulated investors' enthusiasm for participation and enhanced the market's confidence in the future high-quality economic development.

Although the macro and industrial atmosphere is relatively optimistic, and the recent steel market transaction and apparent consumption situation is reasonable, but the author believes that the allocation of long steel futures is not cost-effective.There are two reasons:

1. Lack of steel consumption highlights.This year's increase in steel consumption mainly comes from xiongan New Area, and steel prices in North China have been stronger than in other regions.According to research and calculation, the steel used in construction projects in xiongan New Area in 2020 will be about 5 million tons, ensuring the steel consumption in North China in the third quarter.However, under the positioning of "housing not speculation", real estate development investment and new construction data performance is not outstanding.In may and infrastructure, according to estimates, broad and narrow infrastructure investment growth is 10.9%, 8.3% respectively, compared to the divisions, such as electricity, shipment, water utilities, such as investment growth of 28.8%, 11.2% and 5.1% respectively, it also confirms represented by electric power, 5 g of new infrastructure is the main direction of the current infrastructure investment, because these areas of steel consumption is less, the construction of steel consumption of the drive may be weaker than expected.

2. Funds prefer the supply of rigid varieties, and steel supply elasticity is strong.The macro recovery has led to the recovery of industrial products, of which copper is the most prominent. On the one hand, it is due to the strong investment demand of power in the downstream, and on the other hand, due to the low copper price in the past two years, upstream supply is relatively rigid, and affected by the overseas epidemic, copper supply is more disturbed.Good demand, supply rigid varieties are more favored by capital, iron ore price upward logic is similar.Due to the increase in the proportion of steel furnace production capacity and the strong expectation of electric furnace production in the second half of the year, the steel supply is more and more flexible, adding factors of high inventory, insufficient willingness to actively push up capital, mainly to passively follow up.

In general, the steel supply and demand in the third quarter of the pattern is a large probability event, the domestic macro environment is warm, relatively loose capital will continue to support the steel market optimistic expectations.But considering the fundamentals of steel and the current price level of the current situation, the author believes that the current price level to do long rebar futures driving force is not strong, inadequate margin of safety, investors are advised to stay on the sidelines, relying on the cost of electric furnace to buy more appropriate.