Demand off-season coke back to the weak

As we understand, despite a strong rebound in coke prices following August, by late October 2012, the upward momentum began to plateau and entered a phase of weak consolidation in the short term. Currently, with the demand season winding down, coke prices are reverting to their weaker trends.

The fundamental reason lies in the lack of substantial demand initiation, and the industrial surplus is unlikely to reverse in the short term, potentially even over the next few years. While the macro-economy has stabilized temporarily, the de-stocking pressure in the industry remains significant. Seasonal demand has shifted into a downward trajectory, leading to a bearish sentiment in the market. The broader correction at the medium-term bottom continues to dominate the narrative.

On the macroeconomic front, the trend is stable but not without challenges. Data from the preliminary PMI and industrial added value in November suggests a clear short-term rebound in the macroeconomy. Both the official PMI in October and the HSBC PMI in November have risen above the breakeven line. However, it’s important to note that this recovery carries a certain degree of fragility.

Firstly, PMI data has remained in a downward channel since early 2010. The official PMI's rebound strength is quite weak, merely breaking through its resistance line, with a sluggish expansion rate. The data on new orders indicates that the medium-term growth of the economic scale is not optimistic. The GDP growth rate for Q3 was 7.4% year-on-year, and achieving a 7.5% growth target for the final quarter of the year seems attainable but not overly ambitious. Short-term economic expansion remains challenging.

Secondly, seasonal factors play a role. September to November is typically the peak production period for various industries in the second half of the year, so a gradual recovery is expected. However, with the arrival of November, the increased rainfall and snowfall in the northern regions have slowed outdoor construction activities, reducing the demand for steel and other building materials.

Lastly, the annual economic conference has yet to convene, and social investments are currently at a low point. The annual economic conference will take place in Beijing from December 12th to December 14th, setting the tone for next year's economic work. Before the conference, investors are adopting a wait-and-see stance. The goals and direction of economic development will provide clear guidance for future investments.

In terms of industry research, the seasonal demand for rebar is entering its off-season, and coke is following suit as steel production declines. From June to November this year, the correlation coefficient between the coke 1305 contract and the rebar 1305 contract was as high as 0.95, indicating that the trend in rebar prices plays a decisive role. Why does rebar dictate coke rather than the other way around? This is primarily due to the single upstream and downstream nature of the coke industry chain. Coking coal is primarily used to produce coke, which in turn is mostly used for steelmaking. Therefore, changes in steel demand directly impact the upstream coke and coking coal industries.

Since July, there has been a noticeable decline in national steel inventories and the formation of inflection points. Steel production rebounded in September after hitting a low in August, continuing to improve in October. This recovery was partly due to better-than-expected economic data in the second quarter, prompting monetary policy to ease in June and July. The increase in new loans in the banking sector showed clear signs of recovery. Starting in August, new social investments significantly boosted steel demand. However, due to rising CPI pressures in the latter part of the year, monetary policy could not be further relaxed. Instead, the central bank adopted short-term liquidity measures through open market operations while maintaining a cautious approach to long-term money supply.

Overall, steel inventories are also rebounding. Steel production has already started to decline in November, and the peak period has passed. In the coming months, we expect inventories to rise again. We believe that due to the rebound in steel prices, some inventories have been converted into invisible stocks, making the actual demand appear lower than the apparent demand.

In October and November, steel enterprises operated at full capacity, returning to a state of severe overproduction similar to the beginning of the year. In October, the bottom-line rebound in steel prices improved the profitability of the steel industry compared to the previous year. By the end of October, the profit per ton of rebar and wire rod was around 300-400 yuan, while the profit per ton of sheet steel was around 40-250 yuan. The improvement in profitability led to a sharp increase in enterprise startup rates, and downstream iron ore inventories were quickly digested.

For coke, the decline in downstream steel demand signals the end of a good period. Monthly coke production reached 36.84 million tons in October, hitting a new high in three months and remaining highly consistent with steel production levels.

It is anticipated that coke will follow steel into a phased low in the near future. However, with macroeconomic stabilization and the implementation of economic policies next year, steel prices are expected to stabilize. The real estate industry has emerged from its trough in the first half of the year, and railway investment is expected to remain stable. Coke in the later stages is likely to experience upward fluctuations. Nevertheless, the coke market in the medium term remains under pressure, with supply and demand dynamics returning to weakness.

In late October, coke failed to break through its six-month moving average and reversed course. Although it found support from the 60-day moving average, the pattern of weak fluctuations persisted. By the end of October, coke broke below its downward range. It is expected that coke volatility will continue to face downward pressure in December, and it cannot be ruled out that new lows may be set. It is advisable to consider a bearish midline strategy above the 1305 contract at 1600.