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**Summary of Steel Prices and Monetary Conditions in the First Half of the Year**
After a continuous decline in the first half of the year, steel prices have returned to last year’s lows. Although there has been a small technical rebound, the market has not fully escaped the downward trend. At the same time, the monetary environment has undergone unexpected changes. Initially, inflation concerns were on the rise, but now, the situation has shifted—funds are suddenly cooling down, adding further pressure to steel price declines.
What caused this sudden change in the short-term monetary environment? A careful analysis of the underlying factors can help us understand the direction of macroeconomic policy in the second half of the year, and thus better predict the future trend of steel prices. Below, I provide a brief analysis of the current market situation based on information gathered from various sources.
**Behind the "Money Shortage" Phenomenon**
The "money shortage" that emerged at the end of June is the result of deep internal and external factors. Focusing only on international or domestic developments would lead to an incomplete understanding of the issue.
**1) Internationally: The Exit from QE Becomes Clearer**
On June 19, Federal Reserve Chairman Ben Bernanke announced that if the economic recovery continues as expected, the Fed will slow its bond purchases by the end of this year and stop them entirely next year. This marked the clearest exit plan from quantitative easing (QE) so far. While global markets reacted negatively in the short term, the long-term withdrawal of QE could lead to differentiation in asset prices across regions and sectors.
According to recent Fed expectations, if the current recovery pace continues, the U.S. unemployment rate is expected to fall to 7% by mid-2015, triggering the end of bond purchases. However, two major risks remain: rising interest rates and fiscal policy uncertainty. If interest rates rise too quickly, it could threaten the U.S. economy's moderate recovery. Meanwhile, the ongoing fiscal cliff debate and the upcoming debt ceiling issue add more uncertainty.
In response, the Fed is likely to maintain a "wait and see" approach. If the economy shows strength, it may cut back on stimulus earlier than planned. If the recovery falters, the exit could be delayed. However, the Fed cannot continue QE indefinitely. Once the stimulus ends, capital flows will shift, leading to global market volatility.
**2) Domestically: Deflation and Inflation Expectations Coexist**
Domestically, deflationary pressures coexist with inflation expectations, making adjustments more complex. Despite efforts by regulators to increase SME loan growth, the proportion of SME loans remains low at around 18%. Moreover, the structure of credit between the real economy and the financial sector is imbalanced. Medium- and long-term corporate loans have declined over the past two years, indicating reduced support for the real economy.
At the same time, new loans have mainly flowed into real estate and large enterprises, exacerbating structural imbalances. Small businesses face greater financing challenges, while the real use of loans for productive activities remains low. This has led to increased reliance on short-term bill financing and a drop in medium- and long-term lending.
The concept of "activating money and credit stocks" was recently introduced by Premier Li Keqiang, aiming to improve the efficiency of existing credit resources. This reflects a deeper understanding of China’s monetary and economic challenges. The decision-makers are likely to implement structural reforms to address these issues, with more precision than previous policies.
**Steel Price Outlook for the Second Half of the Year**
Since June, international iron ore prices have dropped sharply. Despite the downward trend in steel prices, I believe that major iron ore producers will focus on price reductions to improve their financial reports and manage production costs. Domestic iron ore production, supported by strong demand, continues to exert pressure on smaller producers.
Moreover, steel mills that faced high input costs in the first half of the year are now using lower-cost raw materials, which should improve profitability in the second half. Structural adjustments in monetary policy will also bring new momentum to the steel market. With liquidity being redirected toward the real economy, downstream demand for steel is expected to strengthen.
In the second half of the year, the steel industry—known for overcapacity—may see increased mergers and acquisitions, driven by stricter environmental regulations. The handling of violations in Hebei signals a shift in priorities, emphasizing long-term sustainability over short-term gains. Overall, steel prices are expected to show cautious optimism.