Introduction: Where does the “strongest” hot coil in the fourth quarter stand out?
Interview Guest | Chen Mo, Futures and Spot Manager of the Ferrous Metal Business Department. Please contact the poker author Jun (ID: puoker) for authorization before reprinting. Core Viewpoints
The strength of hot coil relative to rebar in the fourth quarter is due to the following factors: Firstly, the limited conversion of molten iron into steel in steel mills; secondly, the expectation of inventory replenishment in the manufacturing industry at the end of the year, while the demand for building materials is relatively weak; thirdly, the production restrictions imposed by the “2+26” policy have a greater impact on the supply of hot coil compared to rebar.
- It is believed that the hot coil spot market has reached a temporary high point in the short term, and it may be difficult to achieve a breakthrough before the New Year.
- The supply and demand situation in the “2+26” production restriction areas cannot simply represent the overall market supply and demand. Instead, attention should be paid to the scale of production increase outside the restriction areas and changes in the increment of electric arc furnaces.
- The market’s acceptance of high-priced hot coil resources is currently low, making transactions challenging and overall demand quite limited. Looking ahead from a macro perspective, the situation remains tight for infrastructure and real estate. The continuous rise in market interest rates is not conducive to enhancing the positive attitude towards downstream fixed assets investment industries. Therefore, the overall black metal sector is relatively bearish.
- The seasonal reduction in shipments from mines, the increase in demand after the end of production restrictions during the heating season, and the overall increase in crude steel output will lead to a relatively strong pattern of iron ore compared to finished steel products after the beginning of spring next year.
- Attention should also be paid to changes in hot coil inventory data. Once the restocking actions of end-user demand for hot coils are completed, they will be directly reflected in the overall inventory changes, and the phase of market conditions driven by demand will come to an end.
- In terms of market operation, it is not suitable to trade the coil spread at this point. The main focus should be on iron ore. It is advisable to conduct reverse arbitrage operations at the right price, that is, selling 1801 contracts and buying 1805 contracts of iron ore. For the 1801 iron ore contract, opportunities for short selling can also be sought.
PUOKE exclusive interview with a heavyweight guest
Chen Mo, serving as the Futures and Spot Manager of the Ferrous Metal Business Department of a domestic main board listed company, has a relatively in-depth research on iron ore and steel products. He is familiar with the current development status and policy dynamics of the domestic ferrous metal industry, and has a good understanding of their impact on the overall ferrous metal industry chain. He possesses abundant spot channel resources and information resources in the industry. Additionally, he has a solid foundation in economic theory and macroeconomic analysis, strong sensitivity and research and judgment abilities, as well as excellent data analysis and writing skills. He is proficient in using economic analysis methods to comprehensively evaluate the current status of macroeconomic operations and future policy disturbance variables. His research findings on the ferrous building materials industry have been published multiple times by several mainstream media in China and have received widespread praise within the industry.
Full interview content:
➤ Poker Finance: Recently, the market seems to unanimously believe that hot coil will be the strongest performer among the black metals in the fourth quarter. What is your view on this?
Chen Mo: Regarding hot coil, I actually issued a research report on it in early June, pointing out that hot coil would start to gain strength relative to rebar at the end of the third quarter, that is, starting in August.
This is based on three reasons:
Firstly, due to the limited conversion of molten iron in steel plants, production enterprises are sensitive to the profitability of different varieties. Generally, they actively adjust the flow of molten iron based on the profitability of finished products. In the early stage, steel plants preferred rebar with higher profitability, and generally tended to choose to produce rebar finished products or billets used for rolling rebar for the market, which resulted in ineffective accumulation of coil stock.
Secondly, by the end of the year, the market will have an expectation for restocking in the manufacturing industry, but the demand for the infrastructure industry, that is, building materials, will be relatively weak.
Thirdly, due to policy disturbances, the main operational logic has also changed from the previous period. As you may be aware, the impact of the “2+26” policy’s production restrictions on hot coil supply is relatively greater than that on rebar.
In summary, the combination of demand-driven factors and supply reduction is the reason why hot coil outperformed rebar in the fourth quarter.
In addition, according to the data, the overall inventory of building materials had been continuously rising previously. Based on the pattern of inventory cycle changes in previous years, from two weeks ago to the next two to three weeks, there should have been a downward trend in inventory. However, before this week, the inventory did not decrease but increased, and the extent of inventory reduction was relatively insufficient compared to expectations. This also led to a weaker performance of rebar.
➤ Poker Finance: So you think the strength of hot coil in the fourth quarter is relative to that of rebar. But if we look at hot coil alone, will it also show a strong trend?
Chen Mo: If we look solely at the hot coil market, I don’t think it will continue to strengthen. Considering the current market’s acceptance of high-priced resources, there are certain issues, and environmental concerns have also significantly suppressed downstream demand. It can be said that the spot market for hot coil has reached a temporary peak in the short term, and it may be difficult to break through at least before the New Year.
It can be observed that the highest spot price during this period was on Monday, with an opening quotation of around 4250 in Jiangsu region. However, due to the subsequent weakening of the market, the price was adjusted downwards to 4210. Personally, I believe that the spot price of 4250 is a temporary high point in the short term, and it will be difficult to break through the level of 4300.
There may be a viewpoint that the impact of the “2+26” production cap on hot coil supply is greater than its impact on demand, and therefore, it ultimately benefits hot coil. However, the problem lies in the fact that we cannot only focus on the magnitude of production reduction within the “2+26” production cap region, but also need to pay attention to the potential scale of production increase in regions outside of the “2+26”.
Based on the data I have currently obtained, the total impact of the “2+26” policy on pig iron production is approximately 53-55 million tons. However, in the market, the increase in electric arc furnace (EAF) production has not been noticed for a long time. In fact, EAF production has been increasing all along, which can compensate for the reduction caused by production quotas to a certain extent.
Furthermore, the “2+26” policy affects both supply and demand. Even though the supply affected may exceed demand within the production-limiting regions, considering the reasons I have analyzed, we can no longer simply use the supply and demand situation in the “2+26” production-limiting regions to represent the overall market situation.
Therefore, our main focus at present should be on the scale of production increase outside the production restriction areas and the changes in the increase in electric arc furnaces.
Based on the recent data released by the China Iron and Steel Association, crude steel production continues to rise, indicating that the national crude steel production has not declined. Therefore, I am not optimistic that the “2+26” policy will have a significant impact on the overall supply of steel products nationwide.
➤ Poker Finance: What is the current fundamental situation of hot rolled coil? Is there anything worth looking forward to in terms of macroeconomic outlook?
Chen Mo: Overall, I believe that the fundamentals of hot rolled coil have not changed significantly compared to the previous period, and inventory levels have only declined slightly.
As I mentioned earlier, the market’s acceptance of high-priced resources is currently low, making transactions challenging. Judging from the changes in inventory of hot-rolled coils and their secondary products, such as galvanized sheets or cold-rolled products, in the southern region, the market demand for hot-rolled coils is quite limited. This situation, reflected on the market, has led to the initial decline followed by a recent rebound, but ultimately resulting in a downward shift in the overall price center of gravity.
From a macro perspective, from the end of Q3 to Q4, fiscal policy still adopts a neutral strategy, but it remains tight for infrastructure and real estate. Market interest rates have continued to rise, which is also not conducive to enhancing the positive attitude towards downstream fixed assets investment industries. Therefore, even from the perspective of 18Q1, macro demand remains weak, and capital supply is tight.
Furthermore, based on my analysis, there will be an invisible growth during the period from the production limit during the heating season to its end. Therefore, I am relatively bearish on the entire black metal sector. Hot-rolled coil is also relatively stronger than rebar, with a slower decline. However, after the beginning of spring next year, iron ore may actually perform better.
➤ Poker Finance: Currently, the logic behind iron ore can be said to be relatively clear, and it is believed that its downward trend will also be relatively smooth. What do you think are the reasons for the subsequent strengthening of iron ore?
Chen Mo: Currently, everyone’s bearish view on iron ore does have logical support. The inventory is indeed large, and overall, it’s not like in June this year when the scarcity of high-grade resources and structural inventory contradictions supported its price rise.
The reason why I believe the market will strengthen subsequently is that after the start of spring next year, the heating season production restrictions for steel mills will end. The overall increase in crude steel production will drive demand for iron ore, and the demand for high-grade resources will also increase significantly. Furthermore, there is a high probability of an expected wave of restocking at that time. Coupled with the fact that the beginning of the year is a period of low supply from Australia, it is quite reasonable for iron ore to be stronger relative to finished steel products due to various reasons.
In summary, the combination of reduced seasonal shipments from mines, increased demand following the end of production restrictions during the heating season, and overall growth in crude steel output will lead to a relatively strong pattern of iron ore relative to finished steel products next year.
➤ Poker Finance: So, what other issues should we pay attention to in the future?
Chen Mo: As I mentioned earlier regarding the hot coil variety, it has reached a short-term phase high. And I recall writing in the poker quiz that we should pay attention to the price difference between hot coil and rebar. If the price difference between the two can reach a level of 400-450, we can consider allocating some positions based on the coil-rebar price difference, because I don’t believe it will reach a level above 500 as it did last year.
In addition, for hot rolled coils, we still need to pay attention to changes in its inventory. Considering the current price of hot rolled coil spot and the exchange rate, exports this year are unlikely to be feasible. In the later period, the overall situation of the manufacturing industry, including shipbuilding, containers, vehicles, and other industries, will see an end to inventory replenishment. Once inventory replenishment is complete, it will be directly reflected in the overall inventory changes, and the phase of the market driven by demand will also come to an end.
➤ Poker Finance: Do you have any suggestions on board operation to share with us?
Chen Mo: Currently, it’s definitely not suitable to trade coil and rebar at this price difference. The price difference between the two is around 300. As I mentioned earlier, it’s best to wait until the price difference exceeds 400. If you simply want to go long on hot coil, I wouldn’t recommend doing so. The clearer fundamental aspect of the market is that hot coil is stronger relative to rebar, not that hot coil will continue to strengthen. Going long on hot coil alone is very risky.
For me personally, the opportunity I am currently focusing on is in the iron ore market. Based on my fundamental analysis, I am optimistic about conducting reverse arbitrage operations at the right price, specifically selling 1801 contracts and buying 1805 contracts. Additionally, I am relatively pessimistic about the 1801 contracts, as the downward trend is quite evident. Therefore, I tend to seek shorting opportunities. However, there may be a possibility of a stronger trend and an increase in position holdings in the short term. That being said, we still need to be patient for the time being. If the market price can reach above 470, ideally between 480-500, then it will be relatively safer to go long.