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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, current steel prices have fallen back to last year’s lows. Although there has been a small technical rebound, the market has not yet fully escaped the downward trend. At the same time, the monetary environment has experienced unexpected changes, shifting from early signs of inflation to sudden liquidity constraints. This tightening of financial conditions has further pressured steel prices, adding new downward momentum.
What caused this short-term freeze in the monetary environment? A deeper analysis of the background reveals that macroeconomic policies are likely to evolve significantly in the second half of the year, which will shape the future direction of steel prices. Below, I provide a brief analysis of the current market situation based on available data and insights.
**Behind the "Money Shortage" Phenomenon**
The emergence of a "money shortage" at the end of June was not an isolated event but the result of complex internal and external factors. Focusing only on international or domestic developments would lead to a one-sided understanding.
**1) Internationally: The Exit of Quantitative Easing**
On June 19, Federal Reserve Chairman Ben Bernanke announced a clear timeline for the exit from quantitative easing (QE), stating that if economic recovery remains on track, bond purchases could be reduced by the end of the year and stopped entirely by next year. This marked the most explicit signal yet about the Fed's policy shift, causing initial market volatility.
While the immediate reaction was negative, the long-term implications of the Fed's withdrawal from QE could lead to asset price differentiation across regions and sectors. If the U.S. unemployment rate drops to 7% as expected, the Fed may begin tapering its bond-buying program. However, two major risks remain:
- **Interest Rate Pressure**: Rising interest rates could threaten the U.S. economic recovery. The 10-year Treasury yield has already increased from 1.66% to 2.33%, signaling growing concerns about inflation.
- **Fiscal Policy Uncertainty**: The ongoing fiscal cliff debate and potential debt ceiling issues in Congress add uncertainty. Until these are resolved, the Fed is unlikely to fully withdraw support from the economy.
In the medium to long term, the end of QE may strengthen the dollar and trigger capital flows back to the U.S., putting pressure on emerging markets and affecting global capital flows.
**2) Domestically: Deflation and Inflation Expectations Coexist**
Domestically, the situation is more complex. While deflationary pressures persist, inflation expectations are also rising. Structural issues in credit allocation and financial flows make it difficult to achieve balanced growth. Despite efforts to direct credit toward SMEs and real estate, much of the new lending continues to flow into speculative sectors, worsening the imbalance.
Moreover, the structural adjustment of money supply and credit is becoming a key focus. Activating the stock of money and credit means rethinking how banks allocate their balance sheets, aiming to channel funds more effectively toward the real economy rather than speculative or inefficient sectors.
**Steel Price Outlook for the Second Half of the Year**
Since June, international iron ore prices have dropped sharply. While steel prices continue to fall, I believe that international iron ore producers will attempt to improve their financial performance through price cuts, which could temporarily depress Chinese steel prices. However, this strategy is limited in the long run.
Domestic steel mills, having absorbed high-cost raw materials in the first half, are now reducing costs and improving profitability in the second half. Additionally, the structural adjustment of monetary policy is expected to bring new vitality to the steel market, supporting downstream demand and stabilizing prices.
Looking ahead, the steel industry is expected to see improved performance in the second half of the year. With stricter environmental regulations and increased merger activities, overcapacity will be gradually addressed, leading to a more sustainable market. Overall, steel prices are expected to remain cautiously optimistic.