China Steel Sector: Ferrous rebalancing underway; met coal near-term peak, steel margins to recover

Research evidence excerpt

China Steel Sector: Ferrous rebalancing underway; met coal near-term peak, steel margins to recover

tomorrow amy-yi.li@ubs.com

following 6 consecutive hikes (+Rmb320/t), and Rmb50-100/t of chemical by- +44-20-7568 2064

product profits helped partly cushion coal cost inflation. Channel checks point to 3 George Eadie

rounds of cuts (~Rmb150/t) by Aug. Industry coke margins currently average Analyst

~Rmb50/t (Figure 9Cokeprofitsstayaroundbreakeven), while leading producers earn up to Rmb100/t on blending george.eadie@ubs.com

cost and sales advantages. Further coke price cuts are likely to push much of the +1-646-996 4596

industry back into breakeven/losses.

Iron Ore: ore prices have fallen 8% (~US$7/t) in May-Jun, pressured by the

CMRG-BHP settlement, Simandou ramp-up and elevated port inventories (Figure

10Ironoreportinventory~170mt), easing steelmaking costs by ~Rmb80/t. Prices have recently found support

from the firmer freight rates and the CMRG-FMG ban. With both mills and coking

plants operating at thin margins, iron ore remains the key swing factor, in our view.

Higher ore prices would cap further coal upside, while lower ore prices would

support mill profitability and offer coal price support.

Ferrous value chain rebalancing to drive steel margin recovery in 2H26

We think steel mills' margins should slowly recover from current nationwide losses: 1)

Met coal supply remains tight against strict Shanxi safety inspections, but mine supply

slowly recovered from early-July lows WoW. Entering into Sep-Oct26 high-demand

season, even if pig iron output rebounds from ~2.36mt/d low levels back to ~2.43-

2.45mt/d peak (similar to end-Jun), met coal's demand-supply tightness would largely

recover from current levels. 2) Steel: prices remain soft in Jul-Aug low season, but