Why Stainless Steel Keeps Falling Despite Marginal Supply Contraction?
Stainless steel in September saw a triple divergence: high-level supply, elevated inventories, and falling prices. Crude steel output hit a recent high in August. September production plans dropped month-on-month yet still rose year-on-year. Voluntary production cuts by steel mills were limited and failed to digest inventories effectively. Looking ahead, falling prices will force steel mills to make further output cuts. Stainless steel prices are projected to fall first and then rebound.
High Output amid Falling Prices
In August, crude-steel output of 43 domestic stainless steel mills stood at 3.7413 million tonnes, up 163,700 tonnes or 4.58% month-on-month and 12.84% year-on-year. Output reached 3.8163 million tonnes in May. After declining to 3.5154 million tonnes in June, it rebounded for two consecutive months, with the 300-series posting the largest increment (+7.85% month-on-month). Cold-rolled output amounted to 1.4431 million tonnes, rising 5.29% month-on-month; the capacity utilization rate climbed back to 71%.
September witnessed marginal supply contraction. Planned crude-steel output was 3.6173 million tonnes, down 3.31% month-on-month but up 5.56% year-on-year, remaining at a high absolute level for the past three years. More importantly, while crude-steel scheduled output fell, planned cold-rolled output edged up to 1.4705 million tonnes (+1.9% month-on-month). Tradable supply did not shrink but expanded instead, which greatly weakened the inventory-reduction effect of production cuts.
Corresponding to rising output, inventories built up across the board. At end-August, social inventory across 89 warehouses was 1.1553 million tonnes (+4.82% versus July). Mill-held inventory at 15 steel producers reached 1.1231 million tonnes (+1.36% month-on-month, +25.65% year-on-year). Social inventory stayed above 1.15 million tonnes throughout September with extremely slow digestion, posting merely a 0.55% weekly decline.
In late September, private-mill 304 cold-rolled stainless steel was quoted at RMB 13,750-13,900 per tonne, and hot-rolled material at RMB 13,550-13,600 per tonne, down roughly RMB 350 and RMB 250 per tonne respectively from end-August. Futures once touched RMB 13,680 per tonne, hitting a six-month low.
The root cause lies in a severe mismatch between the scale of production cuts and inventory pressure. September planned output was lowered by only 124,000 tonnes. By contrast, total social inventory stood at 1.15 million tonnes and mill inventory at 1.12 million tonnes. Such a marginal output reduction was negligible against an inventory base of over 2 million tonnes, and was further offset by higher cold-rolled production. Demand in the traditional “Golden September” season was disappointing; transactions were dominated by sporadic rigid orders. Weaker raw-material prices further eroded cost support. The combination of excess supply, bloated inventories and sluggish demand explains why prices kept sliding even as supply edged lower.
Market Outlook: Fall First, Then Rebound
Near-term downward pressure persists: high scheduled production, slow inventory digestion, and under-expectation “Golden-September” demand. If concentrated pre-holiday purchasing takes place, prices may stage a mild bounce. Without solid fundamental backing, however, the rebound will be short-lived and followed by renewed downward pressure.
In the medium term, falling prices will compel steel mills to curb output. By mid-September, the profit margin for private mills producing 304 cold-rolled stainless steel using purchased high-nickel pig iron was merely 0.02%-0.42%. Some marginal production capacities have nearly hit the break-even line. Further price declines will force high-cost facilities into maintenance. Once the negative feedback loop of “losses → production cuts → inventory digestion” kicks off, inventories are expected to fall accordingly. Supply-demand fundamentals will see marginal improvement, paving the way for a phased price stabilization.
Stainless steel prices are expected to fall first and then rise. In the short run, high inventories and weak demand will prevail, keeping prices in a weak fluctuating pattern. After price declines push mills to cut output and inventory digestion materializes, prices are likely to stage a bottom-out rebound.