Zhongjin: "Anti-internal incision" market encounters obstacles, black industry seeks solutions from top to bottom

Zhongjin released a research report stating that since the second half of the year, the black series has borrowed "anti-internal competition" sentiment to correct pessimistic pricing, and even briefly regained the decline in the first half of the year. Macroscopically, the trade tensions between China and the United States are easing. Microscopically, molten iron production is high, profits are good, and inventories are low. Supply and demand in the black series in the second half of the year may be more balanced than previously expected. Molten iron production continues to exceed expectations, facing a significant upward revision for the whole year. Additionally, in terms of raw materials, the release of iron ore supply expectations still needs to be fulfilled, and coal checks restrain supply elasticity. Iron ore and coking coal prices may be relatively profitable. However, the above favorable factors are also weakening marginally, and after supply and demand converge, downward pressure on the black series may accumulate again. The main points of Zhongjin are as follows: The "anti-internal competition" rally is shifting to the steel sector, causing the black series to be entangled again. After the prices increased, the fundamentals of the black series showed signs of fatigue, with steel and steel billet inventories accumulating at a faster pace. The willingness of end-users to restock remains relatively low. In terms of the terminal demand this year, direct/indirect exports contributed the majority of growth, but domestic demand remains in a state of contraction. The opening of the bottleneck still depends on the establishment of long-term mechanisms on the demand side. In terms of "anti-internal competition," the steel industry seems to be lagging behind. Since the implementation of "anti-internal competition," the actual profit per ton of steel has expanded and contracted. In the first half of this year, giving up upstream raw materials such as coking coal to steel mills significantly improved the profit per ton of steel. However, the logic in the second half of the year has shifted from natural clearance of steel and raw materials supply to increased steel production and reduced raw material production. Since the central government promoted "anti-internal competition," coal checks have rapidly and significantly exceeded production expectations based on output data. However, steel mills still exhibit a large production inertia when they are profitable, leading profit distribution to tilt back to the upstream. In short, Zhongjin believes that with the redistribution of profits within the black series from demanding profits downstream to steel mills, the relay rally of raw material prices and steel prices may not be able to continue. However, as steel mill profits and profitability remain acceptable, the conditions for negative feedback in the black series are not yet mature. Coupled with warming macroeconomic expectations at home and abroad, the downside space for the black series also seems limited. The market is once again caught in a dilemma in the short term. Looking ahead, the issue of price needs to be solved by price. With the resilience of molten iron and relatively low iron ore inventories, as well as limited domestic supply elasticity of coking coal, bargain-hunting in iron ore and coking coal and other raw materials may be the sector with the smallest fundamental contradiction and price resistance at present. The impact of "anti-internal competition" calls for short-term focus on demand and long-term focus on supply. On the demand side, this year's high molten iron production relies mainly on exports and manufacturing demand, but both have certain risks of slowing down. However, the policy risks for steel exports are accumulating, and forward indicators such as manufacturing loans are not optimistic, with long-term loans decreasing by about 260 billion yuan in July, with an additional decrease of 390 billion yuan year-on-year. The stimulating effect of replacing old with new on domestic demand has begun to weaken, and policies related to "anti-internal competition" may also affect the investment willingness of certain manufacturing industries. It is expected that after the slowdown in exports and manufacturing demand, the supply pressure of molten iron may gradually become apparent. Firstly, the quantitative change in raw material supply is leading to a qualitative change. The valuation of the black series is still constrained by the expansion of the raw material supply curve. It can be seen that the recent rise in prices of the black series has significantly stimulated the marginal release of raw material supply. After the iron ore price returned to above $100 per ton, the enthusiasm of marginal producers for production and transportation has significantly increased. In terms of project climbing production, Mineral Resources announced that the annual production capacity of Onslow in Q2CY25 has reached 32.4 million tons, and it is expected to reach full production level of 35 million tons per year by the end of the third quarter of this year. The West Mangdoo project is also proceeding step by step and is expected to start production in the fourth quarter of this year. Although the contribution in the year may be limited, the climbing production slope may exceed expectations in the future. In terms of coal, domestic "anti-internal competition" may be difficult to change external pressures. Zhongjin previously estimated that when the futures price of coking coal is above 900 yuan per ton, it can basically be profitable. With the limited domestic coal supply, Mongolian coal has no reason not to accelerate transportation to fill the gap. The clearance of Mongolian coal ports has been maintained at a high level recently, and it is expected that the improvement of port infrastructure in the later period will further promote supply elasticity. Secondly, when will the focus of supply-side policies in the steel industry shift from production to capacity. The difference between manufacturing and mining lies in the greater supply elasticity of middle-stage smelting compared to upstream raw materials. If the governance of the steel industry's supply only focuses on the level of production (capacity utilization rate), it may be difficult to fundamentally improve the weak profit distribution. The optimization of capacity is the key to whether the price of the black series can break through the upper bottleneck and whether steel mills can obtain stable profits.