The release of output depends on the price of the required steel or the former high and the latter low.

Production capacity replacement is put into production centrally, and the release of production depends on demand.

On the supply side, the current steel industry has entered a post-supply-side era. The impact of de-production capacity and environmental protection production restriction policies on the formation of steel supply is gradually diminishing. The production capacity of more than 70 million tons will be put into production in 2020. Considering that the technological upgrading of newly put-into-production equipment and partial withdrawal of production capacity are the production capacity withdrawn in the early stage, the overall steel production capacity will still rise, and the release of production depends on demand.

On the demand side, the Central Economic Work Conference still stressed the need to "live without speculation". Real estate financing has been significantly tightened. Real estate investment and new jobs will continue to fall next year.  The primary focus of next year's countercyclical adjustment policy is to strengthen infrastructure construction. The growth rate of infrastructure investment is expected to pick up, but capital and debt will still restrict the growth rate of infrastructure investment.  The prosperity of automobiles and household appliances will improve slightly, but the overall investment growth rate in manufacturing industry will remain low.

The supply of scrap steel is still tight, and the cost of electric furnace steel will still be an important support for the steel price.

At the cost level, the output of the four major mines will resume growth in 2020. It is estimated that the world's new iron ore output will reach 60 million tons, and the price center of iron ore will move downward.  Coke production capacity (1867,7.50,0.40%) is still increasing, and the policy of de-production capacity will also be increased. The current price list is expected to be stronger.  The tight supply of scrap steel is difficult to change, and the cost of EAF steel may still be an important support for steel prices.

Environmental restrictions on production still affect the pace of supply, and monetary and fiscal policies are expected to be further relaxed.

At the policy level, the Central Economic Work Conference stressed that three major battles should still be fought in 2020. Pollution prevention and control efforts should not be reduced. Environmental protection restrictions will still have some impact on the pace of steel supply.  At the same time, the top priority in 2020 is to realize the goal and task of building a well-off society in an all-round way and the 13th Five-Year Plan, and domestic monetary and fiscal policies are expected to be further relaxed next year.

In 2020, the steel price will be higher before and lower after, and the overall price and profit center will continue to move downward.

It is estimated that the main driving force for domestic steel prices in 2020 will still be the demand side. With sufficient production capacity, the release of output will depend on demand and cost, and the steel prices and industry profit center will continue to move down slightly.  In the second half of the year, steel production capacity replacement will be concentrated and real estate investment will be weakened. It is expected that the trend of steel prices in the second half of 2020 will be weaker than that in the first half of the year, with prices showing a trend of high before and low after the year.  It is estimated that in 2020, the fluctuation range of major contracts for thread and hot coil futures will be between 3,000 and 3,800 yuan, and the spot price will fluctuate between 3,200 and 4,000 yuan.  In 2020, the market will focus on the performance of downstream real estate, infrastructure, automobiles and other industries, the investment of new steel production capacity, and the supply of scrap steel.

Review of 2019 Market

Looking back on the trend of steel prices in 2019, it basically conforms to the judgment given in our annual report at the end of last year that "the center of gravity of the overall price and profit level of steel prices moves downward, and the fluctuation range narrows". The fluctuation range of steel prices in the whole year narrows, and the change of fluctuation rhythm accelerates, and the center of gravity of prices and industry profits both appear downward.  As of December 20, 2019, the prices of 20mm thread and 5.5mm hot coil in Shanghai market were 3,860 yuan/ton and 3,880 yuan/ton respectively, up by 1.31% and 6.59% respectively from the end of last year.  The average annual prices of 20mm thread and 5.5mm hot coil in Shanghai market are 3885 yuan/ton and 3776 yuan/ton respectively, down 248 yuan/ton and 308 yuan/ton respectively, down 5.68% and 7.7% respectively from 2018.  From January to October, the iron and steel enterprises that are members of the China Iron and Steel Industry Association realized 158.8 billion yuan in profits, down 34.1% year on year.  Sales profit margin was 4.5%, down 3.1 percentage points from the same period last year.

Compared with previous years, the change of demand side in 2019 has the most direct impact on the fluctuation of steel price. The real estate market shows very strong toughness throughout the year, while the automobile industry shows a continuous downturn, making the thread performance stronger than the hot coil for most of the year.  In November, new real estate developers turned negative, while car output turned positive from negative, making the hot coil performance significantly stronger than the thread at the end of the year.

Judging from the specific operation rhythm, at the beginning of the year, the domestic macro level stepped up the counter-cyclical adjustment, the central bank's monetary policy was loose, the growth rate of real estate and infrastructure investment picked up, the mining price rose sharply due to the mining accident in Vale in the industrial level, the pessimistic market expectation was continuously restored, and the spot price in the driving period rose in shock. In early May, the prices of thread and hot coil in Shanghai market reached the annual highs of 4,150 yuan/ton and 4,070 yuan/ton respectively.  Subsequently, under the influence of the slowdown of real estate investment growth and the continuous record-high crude steel output, the domestic steel price turned into a downward trend.  However, the toughness of real estate is still good, and environmental protection and production restriction still disturb the market periodically. The steel price decline is not smooth. In June and September, there were two waves of 200-300 yuan/ton rebound, but the overall steel price center of gravity continued to move downward from May to October, and the price decline of hot coil was significantly larger than that of thread.  The lowest price in the Shanghai market this year is 3,580 yuan/ton at the end of August and 3,500 yuan/ton in late October for hot rolls.  In November, the mismatch between supply and demand in the market was obvious. In October, crude steel production was negative year-on-year and month-on-month growth. In October, the growth rate of new housing construction area exceeded 20%. In addition, tight transportation hindered the cross-regional circulation of resources. The resource specifications in the southern market continued to be in short supply and the thread price rose sharply.  In December, the strong varieties turned to hot rolls, and the terminal automobile and household appliance industries had poor stock replenishment and transportation. The stock of hot rolls in East and South China markets fell to a new low in the year. The price of hot rolls rose strongly. The thread fell due to the negative turn of new real estate jobs and seasonal decline in demand.

Analysis on Main Influencing Factors of Steel Price Trend in 2019

1. The changes in real estate investment and the growth rate of new construction are basically in line with the operating rhythm of thread prices.

In the first four months of 2019, the cumulative growth rate of real estate development investment and new construction area has steadily increased, reaching the highest value in the year in April.  Among them, the cumulative year-on-year growth rate of real estate development investment in January-April reached 11.9%, and the year-on-year data of real estate development investment in March and April reached the highest point of the year of 11.98%.  From January to April, the cumulative year-on-year growth rate of new housing construction area reached the highest point of 13.1%. The year-on-year growth rate of new housing construction area reached the highest point of 18.06% in March and fell slightly to 15.5% in April. The overall growth rate remained high. Driven by the peak season demand of gold, silver and gold, the inventory was removed smoothly and the spot price during the thread period fluctuated higher.

From May to November, the cumulative growth rate of real estate development investment dropped continuously in all other months except the same in September.  The growth rate of new housing construction area continued to decline in all months except October.  Under the influence of the downward investment growth rate, the overall thread spot price showed a fluctuating downward trend from May to October.  In October, the growth rate of new housing construction reached a new high of 23.23% in the same month, and fell by 2.88% year on year in November, which was the first negative growth since November 2017. Correspondingly, the spot price of thread rose sharply in November and turned into a shock drop in December.

2. The automobile industry showed sluggish performance in the first three quarters and gradually warmed up in the fourth quarter, which has obvious influence on the price of hot rolls.

In 2019, the performance of the automobile industry was relatively sluggish, and the growth rate of production and sales continued to decline year on year.  From January to November, car production totaled 22.858 million, down 9.6% from a year earlier, and car sales totaled 23.11 million, down 9.1% from a year earlier.  The sluggish performance of the automobile industry also made the price performance of hot rolls weaker than that of threads for most of the year.

However, the performance margin of the automobile industry has improved since the second half of the year, with the year-on-year drop in production and sales narrowing. From January to June, the year-on-year drop in automobile production and sales was 14.2% and 12.4% respectively, and the drop in November was all narrowed to within 10%.  In particular, the automobile output in November increased by 3.8% year on year, the first positive monthly output increase since July 2018, which is also an important reason for the overall performance of hot coil prices at the end of the year to be stronger than threads.

3. The impact of the new policies on environmental protection, production restriction and transportation still have periodic disturbances on the production of steel mills and the trend of steel prices

Environmental protection production restriction continued to strengthen in 2018, which became the main logic affecting the trend of steel prices. In 2019, with the renewal of environmental protection equipment in steel mills and more emphasis from senior management, the impact of environmental protection production restriction on the supply side also weakened, and steel prices returned to the demand side for the most part.  However, in 2019, there will still be two strong environmental restrictions, which will obviously disturb the trend of steel prices in stages.  First, at the end of June, the Tangshan municipal government issued the "notice on doing a good job in stopping and restricting the production of iron and steel enterprises in the city". the policy returned to the "one size fits all" policy, requiring steel mills with a performance rating of class a to limit the production of blast furnaces by 20%, with the rest of the steel mills to limit the production by no less than 50%. the blast furnaces required to cut off production, triggering the market's expectation of a contraction in the supply side and driving the price of the threaded disk to the highest level in the year.  Second, around the time of the 70th anniversary of Daqing, the policy of restricting production continued to increase. The impact on molten iron before and after the festival was close to 4 million tons, triggering a wave of strong expansion of the threaded disk before the National Day.

In addition to the policy of environmental protection and production restriction, the new transportation policy has also disturbed the supply of finished products. The Wuxi viaduct incident in October has tightened the control of overloading in the whole country, increased freight rates in many places, strained logistics, and mismatched supply and demand of thread and hot rolls in November and December.  In November, the demand for thread in eastern and southern China exceeded expectations. Due to the shortage of material resources in the north, the thread resource specifications in the southern market were very short. The price of thread in Guangzhou rose to a multi-year high of 4,900 yuan/ton, while that in Hangzhou rose to a year high of 4,200 yuan/ton.  The high price of thread attracted the northern ports to give priority to the delivery of thread, and the delivery of hot rolls was very small, which led to the continuous decline of hot roll inventory in the southern market in December. The shortage of resources and terminal replenishment drove the price of hot rolls to rise strongly in December.

Analysis of Domestic Steel Market Situation in 2020

Demand situation

1. The domestic economy is mainly stable and the growth rate may continue to slow down slightly.

2020 is the closing year of China's 13th Five-Year Plan, the decisive year for building a well-off society in an all-round way, and the last year of the three major battles.  For 2020, when the external environment is uncertain, it is particularly important to maintain the stability of domestic economic and social development. The Central Economic Conference in December continued to refer to the overall "six stability" efforts to keep the economy running within a reasonable range, which also laid the main line of economic work with stability as the main focus next year.  Among them, "stability" is reflected in stable growth, increasing the scale of special debt issuance, and continuing to reduce taxes and fees.  The focus of steady growth is to stabilize infrastructure. The State Council has issued a series of measures to stabilize infrastructure. In the field of financing, in order to further unblock financing channels and relax the reduction ratio of capital for major infrastructure projects.  In terms of matching funds, policy banks have stepped up investment and loans for infrastructure construction.  Stimulate the enthusiasm of local governments to stabilize infrastructure.  China's GDP is expected to grow by about 6.2% in 2019 and 6.0% in 2020, a slight decline from this year.

2. The growth rate of real estate investment and new construction may continue to slow down

The resilience of real estate will continue to exceed market expectations in 2019, and investment in real estate development will maintain a double-digit growth rate.  At the beginning of the year, the growth rate of real estate development investment surged to a nearly five-year high of 11.9% in January-April under the two-way promotion of new construction area and construction area.  After that, sales continued to weaken and financing was tightened. Investment in real estate development increased by 10.2% year-on-year from January to November, which was 0.1 percentage point lower than the growth rate from January to October.

According to various sub-indicators, the cumulative year-on-year growth rate of new housing construction area in 2019 slowed down, reaching 13.1% from January to April, and then gradually fell back. The cumulative year-on-year growth rate in January to November fell to 8.6%, and the year-on-year growth rate in that month fell by 2.88%, which is the first negative year-on-year growth in that month since November 2017.  In 2019, the cumulative year-on-year growth rate of housing construction area for the whole year maintained a high growth trend. From January to November, the cumulative year-on-year growth rate of housing construction area reached 8.7%, the year-on-year growth rate of housing construction area for the month reached 68.33% in March, and the year-on-year growth rate in April and October also maintained above 20%, far exceeding market expectations.  In 2019, the cumulative year-on-year growth rate of land acquisition area maintained a negative growth trend, with a cumulative year-on-year decline of 34.1% in January-February, and then a shock reduction, with a cumulative year-on-year decline of 14.2% in January-November.  From January to November, the cumulative year-on-year decline in completed housing area narrowed to 4.5%, and the cumulative year-on-year growth rate of commercial housing sales area also changed from negative to positive in October and further expanded in November.

It can be seen that the growth rate of real estate development investment continued to maintain a high growth rate of more than 10% after the growth rate of new housing construction area slowed down in the second half of the year, mainly due to the combined effect of high-level construction area and the land acquisition area that started later.  In 2019, the national average monthly construction area reached 222 million square meters, exceeding the average monthly level of 14% in 2018, which to a certain extent laid the foundation for the high growth rate of development investment.  At the same time, since the second half of the year, the purchase area of land has started to increase, slowing down the growth rate of investment in real estate development.

Although the year-on-year decrease in land acquisition area in the second half of 2019 is gradually narrowing, the negative growth for the whole year is certain.  The central economic work conference will still set the adjustment of real estate control for next year as "housing will not be fired". the continuous tightening of real estate financing and the tightening of capital will force real estate enterprises to be more cautious in taking land, and the growth rate of land acquisition area will remain relatively low.  New housing starts usually lag behind land transactions by about two quarters. Land purchase area hit a 10-year low in 2019. New housing starts in November this year have also seen negative growth, which will directly drag down the new construction targets in 2020.  It is expected that the downward trend in the growth rate of new real estate starts in 2020 will continue, and the cumulative growth rate in the second half of the year may turn negative.

Influenced by leading indicators such as commercial housing sales, land acquisition area and new construction area, the cumulative growth rate of real estate development investment is expected to maintain a downward trend in 2020, but the decline will not be too large.  In the first two years, because of the good market conditions, the housing enterprises focused on sales basically, which also led to the increasing scissors gap between sales and completion. In the later period, as the market conditions turned weaker and the housing resources sold in the previous period began to be delivered in batches, the housing enterprises had to speed up the construction period, speed up the construction and completion, so as to realize the return of funds. This also stimulated the housing enterprises to increase their investment in construction and installation to a certain extent, thus providing solid support for the development of investment.  Real estate investment is expected to remain at 6-8% in 2020.

From the policy level, the central policy level changed from the stable expectation at the beginning of the year to the overweight expectation in the middle of the year and then to the stable expectation at the end of the year.  In March, the NPC and CPPCC stated that they would "prevent the real estate market from going up and down greatly". In April, the Politburo meeting of the Central Committee reiterated that "housing is not to be fired". In July, the Politburo meeting of the Central Committee first mentioned that "real estate is not to be used as a short-term means to stimulate the economy". In December, the Central Economic Work Conference reiterated that "we will stick to the position of housing is not to be fired. We will fully implement the long-term mechanism of implementing policies based on the city, stabilizing land prices, housing prices and expectations".  It can be predicted that stability will be the main tone of the real estate regulation policy in the next stage. We will continue to adhere to the orientation of "housing and housing not speculation" and implement the long-term regulation mechanism of "one city, one policy" and "one policy for each city"