International Macro & Geopolitics: Middle East Dominates Sentiment, US Tariff Policy Faces Domestic Headwinds

The situation in the Middle East remains the undeniable global market focus. The US has recently announced a 15% tariff increase, which is encountering significant domestic resistance, with as many as 24 states publicly opposing further tariff hikes. This will undoubtedly impact international trade balances. From an economic cycle perspective, markets follow the macro pattern of "Depression – Recession – Recovery – Prosperity." Combined with the influence of mid-cycle inventory cycles, commodities exhibit rotational rises from "Precious Metals – Industrial Metals – Energy/Chemicals – Agricultural Products." The recent strike by the US and Israel on Iran directly led to crude oil-related products and shipping indices hitting their daily price limits several times this week. Due to this escalation of the US-Iran conflict, the timing for the initiation of subsequent related sectors may be brought forward. While unforeseen events can disrupt the rhythm and intensity of market rotations, the underlying economic logic remains intact. It is particularly noteworthy that energy price fluctuations have a significant driving effect on the overall valuation of ferrous commodities.

Domestic Supply Side: Production Curbs During "Two Sessions" Take Effect, Limiting Near-Term Supply Increases

According to the latest data from the China Iron and Steel Association (CISA), in late February, key statistical steel enterprises produced 16.22 million tons of crude steel, with an average daily output of 2.027 million tons, a slight decrease of 0.1% month-on-month; pig iron output was 15.18 million tons (avg. 1.897 million tons/day, +2.9% MoM); steel products output was 16.89 million tons (avg. 2.111 million tons/day, +11.0% MoM). Regarding operational rates, a survey of 247 steel mills showed a blast furnace operating rate of 77.71%, down 2.51 percentage points week-on-week and 1.80 percentage points year-on-year. The capacity utilization rate for blast furnace ironmaking was 85.32%, down 2.13 percentage points WoW and 1.22 percentage points YoY. The profit rate of steel mills stood at 38.1%, down 1.73 percentage points WoW and a significant 15.15 percentage points YoY. Average daily hot metal production was 2.2759 million tons, a decrease of 56,900 tons WoW and 29,200 tons YoY. Overall, policy has not exceeded expectations, and the market awaits the actual initiation of end-user demand. While blast furnace operating rates and capacity utilization saw slight increases last week, with hot metal output continuing to climb, production cuts in North China during the "Two Sessions" are expected to limit near-term supply increases. Concurrently, electric arc furnace (EAF) operating rates ticked up slightly, with a concentrated resumption of production expected after the Lantern Festival.

Downstream Demand & Inventory: Slow Resumption of Work, Marginal Improvement in Plate Demand

On the demand side, post-holiday end-user demand has largely stalled, with the overall pace of work resumption remaining slow. Looking at specific segments, construction material demand is yet to pick up. For flat products, manufacturing procurement sentiment is gradually warming, leading to a marginal recovery in demand. In terms of inventory, rebar is undergoing normal seasonal accumulation, while the growth rate of hot-rolled coil (HRC) inventories has shown signs of slowing. The real estate market continues to bottom out, with poor new home sales during the holiday period and a persistent widening of the decline in real estate investment. Growth rates for infrastructure and manufacturing investments are also slowing. Overall domestic demand remains relatively weak, while steel exports continue to hold at a high level, serving as a crucial balancing factor for the domestic market.

Raw Materials: Geopolitics Drives Valuation Uplift, but Supply-Demand Fundamentals Weaken MoM

In the raw material market, shipments from Australia and Brazil increased slightly week-on-week, while arrivals continued to decline. Overall supply is showing a recovery trend. On the demand side, despite a slight increase in hot metal output and a MoM recovery in end-user demand for iron ore, demand is expected to decline next week due to the production restrictions during the "Two Sessions" in March. Inventory data shows a decline in port off-take and a continued buildup of port inventories. Mills had replenished stocks before the holiday, leading to a slight decrease in post-holiday inventories. Overall, the near-term supply-demand structure for iron ore is weakening MoM. Futures prices are caught between improving steel market expectations and weakening iron ore demand, exhibiting a pattern of pulling back after rallies, with an overall upward震荡 trend. Iron ore and coking coal/coke have seen significant upward momentum recently due to geopolitical tensions in the Middle East, providing impetus for valuation uplift. Furthermore, steel demand from manufacturing, outdoor infrastructure, and real estate sectors is expected to gradually release starting next week. Combined with the current low valuations in the ferrous complex, capital may easily enter for speculative bottom-fishing. Upward potential is anticipated next week, but participants should be mindful of taking profits.

Policy Outlook & Market View: Curbing "Involution" to Foster Healthy Ecosystem; Short-Term Bullish but Sustainability Questionable

On the policy front, the government work report explicitly emphasizes strengthening anti-monopoly and anti-unfair competition enforcement, rigidly enforcing fair competition reviews, and utilizing a combination of tools such as capacity regulation, standard setting, price enforcement, and quality supervision to deeply rectify "involutionary" competition within industries. The goal is to foster a healthy market ecosystem. This week saw a significant decline in hot metal output, coupled with poor mill profitability and production curbs during the meetings, resulting in a relatively slow pace of blast furnace restarts. In summary, market performance this month has largely aligned with our previous expectations: a decline before the holiday, followed by a post-holiday uptick. Currently, the pressure from the industrial side has temporarily eased during the meeting period, with market focus entirely on policy signals. As the inaugural year of the "15th Five-Year Plan," the signals from the meetings are generally positive. However, in the absence of strong fundamental drivers from the industry side, the sustainability of the uptrend remains questionable. Strategically, it is advisable to watch for opportunities to take profits on long positions and reduce inventory levels after an expected price rally next week.