Policy Expectations Strengthen: Will seamless steel tube prices hit bottom in August?

Overview: Since June 2024, the market trading atmosphere has rapidly “cooled down,” with businesses experiencing a perceived weaker demand coupled with a policy vacuum period. Recently, concerns have arisen over the transitional phase between old and new national standards, leading to a phased weakening in the overall steel futures market. By July 22nd, the highest price of rebar futures fell from around 3800 to approximately 3450, marking a decrease of approximately 9.2%. In terms of seamless steel tube prices (taking the Liaocheng Seamless Steel Tube Price Index as an example), prices have declined by approximately 197 yuan/ton since early June, a decrease of about 4.2%. Considering the lagging nature of seamless steel tube prices, there is still some downside potential in the short term. However, following the important conference, macroeconomic policy expectations have continued to strengthen. The following is a brief analysis of whether seamless steel tube prices can stabilize in the later stages.

1. Relatively Weak Fundamentals of Seamless Steel Tubes

Supply Side

According to the latest weekly survey data on the production of seamless steel tubes nationwide (covering 32 production enterprises with 122 production lines), the output for the third week of July was 301,600 tons, a monthly decrease of 3,400 tons. The capacity utilization rate was 65.54%, down 0.73% month-on-month. The operating rate was 52.46%, with a monthly average decrease of approximately 2% and a year-on-year decrease of about 5%. Although there has been a certain decline in supply, tube mill inventories have increased by about 10% year-on-year. Orders at tube mills remain average, and shipping pressure is prominent, leading to certain constraints on steel mill production. Some regions have plans for new production lines, and some production lines in the eastern China region have already been put into operation, indicating that the supply side may continue to maintain a certain degree of overcapacity in the later stages.

Demand Side

Based on the demand-side performance surveyed over the past two months, overall domestic demand has shown significant contraction, while external demand has maintained a certain degree of resilience. From early June to the present, the average daily sales of the 122 sample enterprises surveyed for seamless steel tubes were approximately 13,100 tons, marking a year-on-year decrease of about 9.6%. Most businesses have reported that factors such as project progress, funding, and construction conditions have contributed to the sustained sluggishness in downstream demand. Despite policy support, its transmission has been relatively slow. In terms of external demand, according to customs data, China exported 518,600 tons of seamless steel tubes in June 2024, a monthly increase of 20.55% and a year-on-year increase of 16.28%. Although exports in the first half of the year decreased slightly compared to the same period last year, they still maintained a high growth rate compared to previous years. Despite anti-dumping and countervailing measures imposed by some countries on China’s seamless steel tube exports and domestic export audits, the demand for seamless steel tubes overseas in the second half of the year remains promising amid high oil prices, and domestic demand may experience periodic releases.

2. Relatively Strong Support from the Raw Material Side

From the perspective of the price difference between Shandong tube billets and Tangshan square billets over the past two months, although the fundamentals of tube billets have remained weak in the short term, the price difference has maintained at around 390 yuan/ton, which is about 70-90 yuan/ton higher than the normal range, indicating that tube billet prices have been relatively stronger than square billet prices. Additionally, the price difference between seamless steel tubes and tube billets has narrowed significantly over the past two months, with an average year-on-year contraction of approximately 100 yuan/ton. The relatively firm tube billet prices compared to seamless steel tube prices have significantly compressed the profits of seamless steel tubes. According to surveys, the theoretical profit of Shandong-based seamless steel tube mills that adjust tube billets was approximately 15 yuan/ton in June and July, marking a year-on-year decrease of nearly 100 yuan/ton. As such, these mills are operating at a break-even point, and raw materials continue to provide support in the short term, limiting the downward adjustment space for tube mill prices.

3. Enhanced Policy Expectations: Seamless Steel Tube Prices Likely to Reach a Temporary Bottom Around August

Following a key meeting, the People’s Bank of China (PBOC) unleashed a “three-pronged attack” on the morning of July 22. First, it announced that the 7-day reverse repo operation in the open market would adopt a fixed interest rate and quantity bidding system, with the operating rate adjusted from 1.8% to 1.7%. Simultaneously, the Loan Prime Rate (LPR) for one-year and over five-year loans were both reduced by 10 basis points to 3.35% and 3.85%, respectively. On the same day, the PBOC also announced a temporary exemption from pledging requirements for Medium-term Lending Facility (MLF) participants selling medium- and long-term bonds.

Moreover, the Political Bureau meeting at the end of this month may signal even greater easing of real estate policies, accelerated debt issuance, and policies focusing on large-scale equipment upgrades and consumer goods replacements. This could lead to a round of strengthened policy expectations in the market.

From the steel fundamentals perspective, the average daily crude steel output of 247 steel enterprises in the third week of July was 2,396,500 tons, an increase of 13,600 tons from the previous week. It is estimated that the average daily crude steel output in July will be around 2,380,000 tons, compared to 2,386,100 tons in June. Despite the high-to-mid-level crude steel output and bearish sentiment, steel prices have not fallen beyond expectations, indicating that the market’s outlook for the future is not as pessimistic as previously thought. The focus for the later trend of steel prices lies in the production control pace of steel mills. There is a high probability that steel prices will reach a temporary bottom by the end of July. As for seamless steel tube market prices, based on the lagging nature of seamless steel tube prices, they are likely to bottom out within about a week after rebar prices reach a temporary bottom. Therefore, there is a high probability that seamless steel tube prices will bottom out in August.