The market consolidated weakly with significant regional differentiation. Last week, the domestic spot steel market generally showed a weak downward trend, with significantly reduced market activity and increased demand differentiation between regions. In South China and parts of East China, relatively stable engineering projects supported decent shipments; however, the Northeast and Northwest regions were particularly weak due to severe cold weather, which essentially halted outdoor construction. Meanwhile, steel mills exhibited a clear coexistence of “voluntary production cuts” and “profit pressure.” Data shows that pig iron production and the output of the five major steel products continued to decline last week, easing supply pressure, but steel mill profit margins did not improve significantly. In the short term, if profitability cannot be effectively restored, voluntary production cuts by steel mills are likely to continue. Considering multiple factors such as macroeconomic policy support, contraction in both supply and demand, and emerging cost support, market analysts generally believe that steel prices are expected to break out of the current downward trend this week and enter a pattern of mainly stable with slight upward fluctuations.

I. Spot Market Under Pressure, Sluggish Transactions Highlight Weak Demand
The spot steel market is shrouded in a bearish atmosphere, with prices shifting downwards. Market feedback indicates that end-user purchasing activity is generally low, with most purchases focused on restocking as needed. Speculative demand is scarce, leading to a significant contraction in overall transaction volume. This situation of “weak volume and weak prices” is primarily due to the seasonal decline and lack of sustainability in actual demand.

Regional Demand Shows a Stark Contrast. Looking at different regions, the market exhibits significant structural characteristics. In southern markets such as South China and East China, some key projects and manufacturing projects are still underway, providing a certain foundation for steel consumption. Therefore, shipments are relatively stable, and prices are more resilient to price declines. Conversely, in the northern market, especially in the Northeast and Northwest, with the sharp drop in temperature, most outdoor construction projects have entered a seasonal shutdown phase, and steel demand has almost reached a “freezing point.” Market transactions are extremely sluggish, and price support is weak. This north-south difference clearly reflects the rigid law that construction steel demand is affected by seasons and climate.

Price adjustments remained stable. Despite the weakening market, steel mills did not panic and drastically adjust prices. This reflects that, given high costs and proactive production cuts, steel mills preferred to maintain stable prices to observe subsequent market changes and avoid falling into a vicious cycle of disorderly price reductions. However, some market transaction prices have already seen implicit price reductions, indicating that traders are more eager to reduce inventory and recover funds.

II. Proactive Supply Contraction: Steel Mills Face the Dilemma of “Reducing Production but Not Increasing Efficiency”

In response to weak demand and to restore profits, steel companies continue to proactively reduce production. Industry data shows that national pig iron production decreased by 31,000 tons to 2.292 million tons, and the total output of the five major steel products (rebar, hot-rolled coil, etc.) decreased by 227,300 tons to 8.0622 million tons, indicating a continued contraction in supply.

Profitability Pressure Behind Production Cuts. Theoretically, a decrease in supply should help alleviate the market’s supply-demand imbalance and provide support for prices. However, in reality, steel mills’ profitability has not fundamentally improved due to production cuts. While raw material costs have eased somewhat, they remain relatively high, and the continued weakness in finished steel prices has severely squeezed steel mill profit margins, putting some companies under renewed pressure to incur losses. This predicament of “reducing output but failing to increase efficiency” highlights the limitations of relying solely on supply adjustments to stabilize the market; a substantial recovery in demand is crucial.

Inventory reduction has slowed, and apparent demand has continued to decline. This week, total inventory of the five major steel products decreased by 335,000 tons to 13.3209 million tons, maintaining a destocking trend, but the rate of reduction has slowed. Apparent demand, which better reflects real consumption levels, decreased by 244,500 tons to 8.3972 million tons,  further confirming the market pattern of “weak supply and weak demand.” Without a recovery in demand, the contraction in supply mainly serves to “stop the decline” and is unlikely to drive a strong price rebound on its own.

III. Frequent positive macroeconomic signals offset the weak reality, with positive signals emerging on the raw material side.

Despite the weak performance at the industry level, the continuous release of positive signals from the macroeconomic policy level has provided important expectation support for the market. Meanwhile, the price trends of major raw materials have diverged, and the cost support structure is undergoing subtle changes.

The macroeconomic tone is clear, and counter-cyclical adjustments are being strengthened. The high-level meeting closely watched by the domestic market has been finalized, with the core focus on “improving quality and efficiency,” and emphasizing the need to “leverage the integrated effect of existing and new policies, and increase the intensity of counter-cyclical and cross-cyclical adjustments.” On Friday, the State-owned Assets Supervision and Administration Commission (SASAC) reiterated its call for central enterprises to “promote the implementation of a number of major projects to support the expansion of domestic demand with incremental investment,” and mentioned “anti-involution.” These statements further strengthen the expectation that fiscal and monetary policies will work together next year to boost domestic demand through major project investment, injecting confidence into the medium- and long-term demand prospects for steel. Internationally, the Federal Reserve cut interest rates by 25 basis points as expected, and the market expects further rate cuts next year, leading to a looser global liquidity environment that helps alleviate external pressure.

The raw material support structure is improving, and downward pressure on costs is easing. Positive changes emerged in the raw material sector:

Iron Ore: Affected by declining pig iron production, steel mills’ immediate demand for iron ore was under pressure, leading to a weak and volatile spot price at ports, with significant upward pressure on futures prices.

Coking Coal and Coke: After a period of continuous price reductions in the previous period, the rate of decline slowed significantly , and market bearish sentiment subsided. More importantly, coking coal and coke futures markets rebounded first after bottoming out, demonstrating strong resilience. This was mainly due to supply-side constraints resulting from the normalization of domestic coal mine safety supervision, as well as the limited replenishment of imported coal. The stabilization and rebound of coking coal and coke indicates that the most important downward driving force on steel costs is weakening, and may even turn into a supporting factor.

IV. The Scrap Steel Market Reflects a Cautious Mindset Among Steel Mills
As an important raw material for steelmaking and a “barometer” of the industry, the scrap steel market price generally remained stable to weak . Steel mills in different regions adjusted their purchase prices based on their own inventory and arrival conditions, with varying directions and magnitudes of price adjustments, reflecting a cautious balance between cost control and production demand.

Steel mills across different regions have adjusted their scrap steel procurement prices differently. From East China to North China, several leading steel mills have updated their scrap steel procurement prices:

East China: Jiangsu Huai Steel and Jiangyin Xingcheng Special Steel maintained stable or slightly adjusted prices for some scrap types; Shandong Shiheng Special Steel’s prices remained relatively stable.

North China: Hebei Shexian Tiantie slightly increased prices for some scrap types; while Handan Xinhui suspended the purchase of high-quality small scrap and rebar ends, indicating a more cautious procurement strategy.

South and Central China: Guangxi Steel and Henan Jiyuan Steel maintained relatively stable prices, with some high-quality scrap prices remaining high.

Overall, the scrap steel market has not seen a large-scale or deep price drop, but the upward momentum is also clearly insufficient. Some steel mills maintained higher prices for high-quality scrap to ensure necessary inventory, while adopting a policy of price suppression or cessation of purchases for some light and thin scrap and broken scrap. This structural difference reflects that, given the current thin profit margins and more favorable pig iron cost accounting, steel mills are making more sophisticated considerations regarding the economic efficiency of scrap steel usage.

V. Outlook: Weak Reality vs. Strong Expectations – Steel Prices May Rise Slightly

Based on last week’s market performance and analysis of bullish and bearish factors, domestic steel prices are expected to move beyond a one-sided decline and enter a phase of competition between “weak reality” and “strong expectations,” generally exhibiting a pattern of slight stability with minor fluctuations.

Strengthened Support: Continued supply contraction (decreases in both pig iron and finished steel production) is providing some support to the market. More importantly, raw material prices, especially coking coal and coke, are showing signs of stabilization and even rebound, gradually strengthening cost support and limiting the potential for a significant drop in steel prices.

Limited Upside Potential: Despite frequent favorable macroeconomic policies that have greatly improved long-term market expectations, short-term end-user demand, particularly construction demand in northern regions, is constrained by seasonal factors and unlikely to see a substantial recovery. While social inventories are declining, the rate of destocking is slowing, and apparent demand continues to decline, indicating that the “weak reality” pattern remains unchanged. Without a corresponding increase in transaction volume, price increases will lack sustained momentum.

Market sentiment is shifting towards cautious optimism: As the bottom of macroeconomic policies becomes clearer, market pessimism has been largely alleviated. After continuous losses, traders and steel mills are less inclined to continue selling at low prices. However, due to concerns about demand uncertainty, operations remain focused on quick turnover and reducing inventory; large-scale stockpiling in anticipation of price increases has not yet occurred.

Note: Reprinted from Steel.com