Weekly: US PCE Core Index Softens To 4.6%; Domestic Steel Inventory Rebounds
Hawkish comments from the Fed Chair last week were supportive of elevated US yields
and strengthening of the US dollar. Powell is not ruling out the possibility of
consecutive rate hikes and expects inflation to return to 2% at the earliest in 2025,
which weighs on the outlook of gold price. Inventory digestion for steel products ended
last week while production remained on the rise. Construction activities were slowed by
the hot rainy weather and demand for steel products and cement to remain suppressed.
WHAT’S NEW
• Metals (maintain MARKET WEIGHT): The Fed’s target of 2% inflation is unlikely to happen
before 2025; soft May PCE lending support to metal prices.
- COMEX gold/LME copper 3-month futures were +0.5% wow/ -0.9% wow US$1,929 per t
oz/US$8,316 per mt. 10-year US treasury yield was down 7bp to 3.81% while the US dollar
index was flat at 102.90. - Hawkish comments from Fed Chair Jerome Powell last week, which included not ruling out
the possibility of consecutive rate hikes, were supportive of elevated US Treasury bond
yields and strengthening of the US dollar. He expects inflation to only return to the targeted
2% only in 2025, with more restrictions on the way, weighing on gold price outlook. - The US’ May Core PCE softened to +4.60%, below consensus of +4.70% but still more
than double the Fed’s target of 2%. China’s May Caixin Manufacturing PMI released on
3 Jul came in at 50.5, slightly above market expectations of 50.0, and lent some support to
the copper prices. - According to CME FedWatch Tool, as at 23 Jun 23, the market was pricing in 86.8% odds
for a 25bp rate hike in Jul 23, and 69.5% odds of maintaining it at 5.25-5.50% in Sep 23. - Looking ahead, market focus will be on: a) FOMC meeting minutes on 6 July; b) US nonfarm payroll data on 7 July (consensus: +225,000), and c) US unemployment rate on 7 July
(consensus: 3.60%).
• Steel (maintain UNDERWEIGHT): End of steel inventory digestion; rising steel output.
- Spot prices largely unchanged. SGX iron ore futures rebounded by 1.5% wow to
US$110.88 per tonne, mainly driven by Li Qiang’s bullish tone on economic growth and
guided more measures to stimulate domestic demand. Hebei iron ore spot price remained
flat at Rmb1,020 per tonne. Spot prices of rebar/hot-rolled coil steel (HRC)/cold-rolled coil
steel (CRC) were -0.2%/+0.3%/+0.4% to Rmb3,809/Rmb3,885/Rmb4,480 per tonne. - 64.07% of steel mills now profit-making. Our self-computed HRC steel-raw materials
spread reversed down 2.6% wow given the correction of steel spot prices last week.
Mysteel’s survey indicates that 64.07% of steel mills are currently profit-making (+3.90ppt
wow).
Steel production still expanding. Last week, the blast furnace capacity utilisation rate of
247 domestic steel mills was 91.98% (+0.38ppt wow), and average daily molten iron
production was up 0.4% wow at 2.4688m tonnes. The weekly output of five major steel
products grew by 0.77% wow to 9.4074m tonnes, with production of rebar/HRC/CRC
+1.19%/+0.76%/+0.16% wow.
Steel inventory digestion ended. Based on Mysteel’s survey, overall inventory has
rebounded 2.3% wow to 15.81m tonnes. Inventory at sampled traders/steel mills dropped
by 1.6%/4.4% wow last week to 11.26m/4.54m tonnes, 25.3%/29.3% lower yoy.
Apparent consumption down 6.33% wow and 11.2% yoy. Apparent consumption for
five major steel products declined 6.33% wow to 9.045m tonnes last week, and was 11.2%
lower yoy. The slump was led by rebars at -14.2% wow and followed by wire rods at
-7.2% wow.
• Cement (maintain MARKET WEIGHT): Stricter 3Q23 staggered production scheme;
rebound in thermal coal prices eroding margins.
Average cement prices dropped 1.8% wow. National average PO42.5 cement price
(bulk) dropped 1.8% wow last week to Rmb382.50 per tonne. Average cement prices for
the Eastern/Central/Southern regions declined 2.6%/4.4%/1.7% wow to Rmb377.14/
Rmb360.00/Rmb391.67 per tonne. Average cement-coal spreads narrowed by another
3.0% wow to Rmb274.60 per tonne, compressed by a 1.2% wow increase in QHD 5,500
thermal coal spot price.
Cement shipment up 1.58% wow. According to 100NJZ’s survey conducted on 250
cement enterprises, weekly cement shipment volume for the week of 21-27 Jun 23 was
5.2595m tonnes (+1.58% wow, -35.2% yoy). By region, the Eastern/Central/Southern
regions saw +2.13%/+1.04%/-6.12 wow changes. For infrastructure projects, weekly
cement direct supply volume grew to 1.99m tonnes +0.51% wow, -11.56% yoy).
Inventory build-up continued. National average cement storage capacity ratio was up
1.5ppt wow to 78.3%. Inventory levels for the East/Central-South China regions were last
reported at 78.7%/80.3% (+2.2 ppt/+0.7 ppt wow).
Slowdown in production insufficient to offset weak demand. Average clinker capacity
utilisation rate declined to 60.26% for Jun 23 (-4.06 ppt mom; -12.6 ppt yoy). Slower
production was mainly due to the high inventory level whereby cement manufacturers had
to halt production.
ESSENTIALS
• We maintain MARKET WEIGHT on the cement sector. Cement demand in the southern
regions was dragged by the hot rainy weather, whereas demand in the northern region
remained resilient as it entered peak construction season. Execution of stricter staggered
production scheme would be crucial to see improvement in supply-demand dynamics and
avoid the price war worsening. Based on the historical trend, cement inventory should peak
around mid-July while prices should bottom in end-July. We believe downside is fairly limited
at the current juncture, partly due to the narrowing production margins subsequent to the
recent rebound in thermal coal prices.
• We maintain UNDERWEIGHT on the steel sector. Market remains hopeful on potential
stimulus policies from the government, which we should have more clarity on during this
month’s Politburo meeting. Steel inventory has started to rebound, and we expect the
inventory build-up to continue in July as the hot rainy weather will continue to suppress
demand from construction projects. We remain cautious on the scope of the potential
government stimulus given the soaring debt levels and stretched balance sheets of local
governments, there will also be time-lag to see actual improvement in steel consumption.