As June begins, China’s steel industry once again finds itself at a critical juncture. On June 1, domestic coking coal futures surged sharply, with the benchmark contract rising more than 7% in a single day. Since the coal mine accident in Qinyuan County, Shanxi Province, in late May, coking coal prices have climbed nearly 20% cumulatively. At the same time, expectations for a fifth round of coke price increases continue to strengthen, further intensifying pressure on raw material costs.In contrast to the strong rally in raw material prices, the steel market has shown clear signs of weakness in recent weeks. After reaching a short-term peak in mid-May, steel prices have retreated steadily. Market transactions have slowed, and steel mill inventories have begun rising again. The profitability improvements that the industry worked hard to achieve in April are now at risk of being rapidly eroded.
Industry analysts believe that against the backdrop of a traditional seasonal demand slowdown, a more challenging export environment, and elevated raw material costs, the steel sector must remain vigilant against falling back into the familiar cycle of “higher output, rising inventories, lower prices, and declining profits.” Production discipline and inventory reduction remain crucial for maintaining stable industry operations.
Looking back at the first five months of 2026, China’s steel industry experienced a typical “first down, then up” cycle.During the first quarter, steel prices remained near multi-year lows for the same period, while demand recovered more slowly than expected. Both mill inventories and social inventories stayed elevated. Most steel producers faced shrinking margins or outright losses, placing the entire industry under significant financial pressure.Data showed that domestic steel price indices remained weak throughout the first quarter, while inventory destocking progressed much more slowly than in previous years. At the same time, profitability across the industry deteriorated significantly, with some companies facing growing cash-flow challenges.
In response to the difficult market conditions, industry associations repeatedly called on steelmakers to follow the operational principle of “Three Determinations and Three Avoidances,” encouraging companies to control production, reduce inventories, and avoid disorderly competition.As most steel producers responded positively, market conditions gradually improved in April. On one hand, mills adjusted production schedules proactively, easing inventory pressure. On the other hand, the supply-demand balance improved, allowing steel prices to recover gradually.Domestic steel price indices rose continuously throughout April, and profitability improved significantly across the sector. Many companies returned to profitability after months of pressure. Importantly, this recovery was not driven by a sharp increase in demand but rather by the industry’s collective efforts to curb production and optimize supply.
However, market conditions began to change again in May.After reaching a temporary high in mid-May, steel prices started to decline rapidly. Rebar prices in the spot market fell continuously, while futures prices experienced even steeper declines. Market confidence weakened, and traders adopted a more cautious stance.Notably, as profitability improved temporarily, some steelmakers became more willing to increase production. Data indicate that daily crude steel output among major steel enterprises rose during May, while blast furnace operating rates gradually increased. In some regions, production growth even outpaced the pace of demand recovery.
At the same time, inventories at steel mills began accumulating once again.By mid-May, inventories held by major steel enterprises had reached one of the highest levels recorded for the same period in nearly four years. Social inventories also remained noticeably higher than a year earlier. The resurgence of inventory pressure suggests that supply-demand imbalances are beginning to build once again.Industry observers believe the greatest risk is not a sudden collapse in demand but rather excessive supply growth during a period of seasonal demand weakness. If production levels are not adjusted in time, steel prices may continue to face downward pressure.
On the demand side, momentum in steel consumption is gradually weakening.As southern China enters its annual period of high temperatures and heavy rainfall, construction activity is being affected, leading to a decline in demand for construction steel products. The property sector remains in a prolonged adjustment phase, with both new housing starts and real estate investment continuing to fall, weighing on long-product demand.At the same time, growth in infrastructure investment and manufacturing investment has also slowed, reducing overall momentum in fixed-asset investment.Another area of concern is the automotive sector. Declining vehicle production has translated into softer demand for automotive sheet, cold-rolled steel, and other related products.Overall, China’s steel market has entered its traditional off-season, while new sources of demand growth remain limited. As a result, the industry is likely to continue facing the challenge of strong supply and relatively weak demand over the coming months.
Over the past two years, exports have served as a key pillar supporting China’s steel industry. However, overseas market conditions are beginning to change in 2026.First, the European Union’s Carbon Border Adjustment Mechanism (CBAM) has formally entered its implementation phase. The new rules increase the carbon-related costs of exporting steel products to Europe, creating additional compliance burdens for exporters.Second, a new round of EU steel safeguard measures is scheduled to take effect in July. Reduced import quotas and higher out-of-quota tariffs are expected to further limit access for Chinese steel products to the European market.In addition, the global trend toward trade protectionism continues. Trade investigations targeting steel products have increased in many countries, creating further uncertainty for exporters.Against this backdrop, exports are expected to provide less support for overall steel demand. Industry forecasts suggest that China’s steel exports will gradually return to more normal levels in the second half of the year, making it difficult to sustain the rapid growth seen previously.
Compared with demand-side uncertainty, cost pressures are more immediate and tangible.Although iron ore prices have not risen dramatically, higher ocean freight rates have increased import costs. Iron ore prices also remain at relatively elevated levels.Even more concerning is the coking coal market. Stricter mine safety inspections, production suspensions in certain mining regions, and tightening supply conditions have driven coking coal prices significantly higher. Recently, coking coal prices have risen much faster than steel prices, widening the gap between weak steel and strong coal markets.
For steel producers, this means profit margins are being squeezed continuously.According to calculations by some companies, average profitability per ton of steel is now approaching break-even levels, while certain mills have already slipped back into losses. If steel prices continue to decline while coking coal prices remain elevated, the profit recovery achieved in April could quickly disappear.
Facing increasingly complex market conditions, the steel industry is entering another critical test.Historical experience shows that when supply and demand become imbalanced, simply increasing production to gain market share rarely delivers sustainable benefits. Instead, it often results in rising inventories and falling prices, ultimately harming the interests of the entire industry.The steel sector has experienced this cycle many times: improved profitability encourages higher production; higher production leads to inventory accumulation; rising inventories push prices lower; falling prices eventually force companies to cut production again.
Breaking this cycle has become a key challenge for achieving high-quality development in the steel industry.Industry experts widely agree that adhering to the principle of “Three Determinations and Three Avoidances,” maintaining disciplined production control, and reducing inventories remain the most practical and effective strategies under current market conditions.Particularly in an environment of limited demand growth, tightening export conditions, and persistently high raw material costs, steelmakers must maintain strategic discipline and align production with actual market demand rather than pursuing blind expansion.
The hard-earned profitability improvements achieved this year deserve careful protection. For steel enterprises, the key question is no longer how to achieve short-term profits, but how to transform temporary gains into long-term competitiveness and sustainable development.As the market enters a crucial adjustment period, production discipline and inventory reduction should not remain merely industry slogans. Instead, they must become long-term commitments that support stable, healthy, and sustainable growth across China’s steel industry in the years ahead.
Note: Adapted from SteelNet.
