Profit Inversion And Capacity Expansion

1, Review and Outlook: Market Trends and Basis
In the first half of the year, stainless steel and Shanghai nickel prices continued to break new historical lows in 21 years due to inventory and production capacity pressures. As July approaches, the "anti involution rectification" action has indeed brought about a market reversal in industries with a surplus of black series. However, although stainless steel has seen a bottoming out trend, the rebound is significantly lower than other varieties. The main reason why stainless steel and Shanghai nickel remain weak under strong expectations is the persistent contradiction between insufficient consumption and capacity expansion. Firstly, downstream consumption has been slow to improve, with limited growth in emerging and traditional steel industries. The Indonesian smelting sector, including NPI, nickel ice, and MHP, has maintained high supply with profits, and the export to China has reached a new high, leading to intensified pressure on domestic inventory and capacity optimization. According to the Steel Association, 11 leading stainless steel companies, including Taiyuan Iron and Steel, Qingshan, and Delong, have reached ultra-low emission levels for steel. Therefore, the industrial chain is still in a negative feedback state, with weak production cuts, high inventory pressure, and a downward shift in price focus. The market is pessimistic about the future, which leads to the inability of futures prices in the near and far months to pull up prices, resulting in an overall flat structure of futures prices. However, although the monthly premium is insufficient, the main holdings have been transferred to the 2601 contract. If the 01 contract can become the main contract in advance in the future, the market may change.
Term structure and basis: subject to market conditions, at historically low levels
From the absolute value and volatility of the basis, it can be seen that the overall basis has weakened since 2022, mainly due to the increase in production capacity and supply, which has led to a more consistent market outlook for future market changes, resulting in almost consistent futures and spot prices. The magnitude of the basis change is relatively small. Since June, the stainless steel basis given by the market has remained around 400 yuan, while the refined nickel basis has mainly fluctuated around 2000 yuan. On the other hand, from the perspective of term structure, there is a downward trend in Contango structure, and the price difference changes in the near and far months are relatively small. Overall, due to market conditions, there are relatively few opportunities for arbitrage between futures and futures, as well as between futures and futures. Even though the anti involution action has driven the overall rise of the black market, the stainless steel industry's response has been relatively flat.
Market outlook: Walking on thin ice
Looking ahead to the future, the Chinese stainless steel industry will continue to face significant pressure to reduce inventory and optimize production capacity. Whether it can achieve supply-demand balance through maintaining active exports, increasing domestic demand, and optimizing industrial structure will determine the overall operational quality of the industry. However, due to the high degree of concentration in the stainless steel industry itself, leading enterprises achieve comprehensive coverage of the industry chain by laying out upstream raw materials (such as nickel ore and chromium ore) to downstream processing and manufacturing. Integrated layout helps enterprises maintain cost advantages during industry downturns, further intensifying industry concentration. Against the backdrop of a downward shift in the price center of gravity, although the anti involution policy has reversed pessimistic expectations in the short term, prices have bottomed out and fluctuated. But in order to break away from the low cost zone in the future, significant supply reforms or overseas cost side tightening are needed before the market can emerge from the low price competition trend.

Nickel material products.

 

                            Nickel plate

                            Nickel rod

                            Nickel pipe

                            Nickel Wire

                  Nickel processed parts

                            Nickel coil

2, Opportunities in Macro Change: Strong Policy Expectations
This round of anti involution faces a higher level of complexity compared to 2015-2018. In the current major internal competition fields, state-owned enterprises dominate, and the relatively backward production capacity has been basically eliminated in the previous round of supply side reform, and the "carbon emissions" have also met environmental protection requirements. Therefore, this anti internal competition campaign will mainly adopt a combination of short-term and long-term measures, with a focus on controlling the increment, such as regulating the investment attraction behavior of local governments for new and repeated ineffective investments, while gradually improving industry standards. Due to the significant achievements in high energy consumption and environmental pollution control in the early stage, the actual effect of phasing out outdated production capacity will not be as good as in 2015. In the future, malicious competition at low prices will be eliminated by gradually improving industry technical standards. Since August 2020, the China Iron and Steel Industry Association has carried out the publicity work of ultra-low emission transformation and evaluation monitoring progress of steel enterprises. As of now, 197 companies have made public announcements on the Steel Association website, and the top companies have gradually achieved ultra-low emission levels for steel. The impact of the new round of environmental impact assessments on the reduction of production in the steel industry is weakening.
From the perspective of overseas exports, tariffs are still uncertain. There is a possibility of variable tariffs on downstream imported stainless steel products exported to the United States. However, from the perspective of direct exports of stainless steel to the United States, the current export volume has almost returned to zero. Although transit trade may still be affected, the focus of domestic stainless steel exports is mainly distributed in Asia and some developing countries. The increase in US tariffs has little impact on the overall export of stainless steel. Therefore, with the industrialization process in emerging market regions, the export demand for domestic stainless steel may continue to grow in the future. The impact of overseas tariff risks is generally controllable.
3, Nickel and stainless steel industry chain: crisis caused by overcapacity in the mining sector Nickel ore: continuous supply, pay attention to new changes in the Philippines and Indonesia
The current Indonesian government has set the approved nickel ore quota for RKAB to reach 364 million tons in 2025, compared to 319 million tons in the same period last year, indicating a significant increase in the approved quota. However, the overall consumption capacity of nickel ore is still relatively weak, with 240 million wet tons of nickel ore actually digested in 2024 last year. Therefore, from the supply side alone, the annual nickel ore production capacity is still surplus, with further increases in Indonesia's nickel ore quota. With the continuous increase in supply, contradictions have intensified, and the market needs to price this excess news.
In the nickel mining sector, the trade pattern of East Asian nickel mines has basically taken shape. With the formation of the downstream nickel industry chain, downstream nickel iron plants gradually alleviate the pressure on nickel ore supply by importing nickel ore from the Philippines. Indonesia has transformed from a nickel ore exporting country to a nickel ore importing country. In the past three years, the average annual import volume of nickel ore in China has been about 40 million wet tons, with China's dependence on nickel ore from the Philippines being the highest at about 30 million wet tons, followed by New Caledonia. However, due to the continuous decline in domestic nickel iron plant production, the demand for imported nickel ore is also decreasing.
Nickel iron: Overseas nickel iron production capacity expands, but profits continue to shrink
In the past three years, Indonesia has continuously released new nickel iron production capacity, far exceeding domestic nickel iron production. At the same time, the amount of nickel iron exported to China has also reached a new high. It is expected that Indonesia's nickel iron production this year will be 1.53 million tons of metal. With the expansion of Indonesian nickel iron manufacturers, domestic nickel iron manufacturers continue to face pressure, and their production capacity is constantly reduced due to long-term losses. At the same time, Indonesia's tax rate in the first quarter increased the price of nickel ore, gradually compressing the profit margin of nickel iron to around 970-990 yuan/nickel. The long-term loss of domestic nickel iron profit mainly comes from the cost of overseas nickel ore, weak stainless steel prices, and the squeeze of environmental protection costs.
The production of nickel iron in the first six months was 137900 tons, a decrease of 7100 metal tons compared to the same period last year. Due to the loose supply of nickel ore and the expansion of production capacity caused by overseas investment, Indonesia's profits have narrowed but still remained profitable. The production of nickel iron in the first six months was 900000 tons, an increase of about 150000 tons compared to last year. Due to the fact that medium to high nickel iron is one of the important raw materials for steel mills to produce stainless steel, the high annual stainless steel production schedule has led to a continuous increase in China's dependence on overseas nickel iron. The cumulative import of domestic nickel iron is 490000 metal tons, an increase of about 100000 metal tons year-on-year.
Looking ahead to the future, the off-season in the stainless steel industry has resulted in meager profits for steel mills, forcing nickel iron prices. However, the continuous record high return flow of nickel iron in Indonesia has exacerbated the oversupply in the domestic market, resulting in the overall low transaction price of nickel iron falling to 900-920 yuan/nickel. The situation of weak demand and overproduction in the domestic stainless steel market in the future is difficult to reverse, and the trend of the nickel iron market may continue to show low price fluctuations, while the capacity utilization rate will continue to remain at a low level.
Increased volume of nickel intermediate products drives domestic import growth
As the world's largest nickel producer, Indonesia has increased its nickel mining tax rate in the first half of the year. However, the production of nickel iron, high ice nickel, and MHP has significantly increased, and the export of raw materials to China has reached a new high. The expansion of production capacity on the raw material side has stimulated downstream producers. The global nickel market is expected to have an excess of 198000 tons of nickel in the next 25 years, and the nickel industry has remained in an oversupply pattern for three consecutive years.
Since the beginning of the year, Indonesia's MHP production has been about 222300 tons, an increase of about 40% compared to 155100 tons last year. At the same time, the production of high nickel ice in Indonesia has remained high, with a production of about 81400 metal tons since the beginning of the year, a slight decrease of 15800 metal tons compared to the same period last year. In terms of nickel iron production, the production in the first six months was 902800 metal tons, an increase of about 150000 metal tons compared to the same period last year. From the perspective of import volume, the reflux of nickel products in Indonesia has continuously reached new highs since the beginning of the year, leading to a continuous increase in domestic refined nickel production. Among them, the import volume of MHP, nickel iron, and high ice nickel is about 942300 metal tons, which is at a historical high.
In the short term, with the operation of more high nickel smelting projects in Indonesia, Indonesia will continue to consolidate its position in the global nickel supply chain, and the continuous expansion of overseas production capacity will continue to suppress downstream spot prices. Looking ahead, Indonesia's MHP production is expected to continue to grow in the coming years, mainly benefiting from the expansion of the global battery market and the Indonesian government's support for the nickel processing industry. With the commissioning of more high nickel smelting projects, Indonesia's future MHP production is expected to surpass nickel iron, gradually increasing its position in the nickel supply chain.

4, Industry Chain: Expansion of Domestic Production Capacity and Surge in Import and Export Stainless Steel: Profits are meager, but it is difficult to significantly reduce production
There are four smelting processes for stainless steel: self-produced high nickel, externally sourced high nickel iron, waste stainless steel, and low nickel iron with pure nickel production process. The main raw materials for smelting are nickel iron, chromium iron, and waste stainless steel. Currently, regardless of which production process is used, the overall profit is meager. From the perspective of historical profit comparison, in recent years, due to the downward trend of stainless steel prices, the overall profit of steel mills has been shrinking. At the same time, the problem of overcapacity still exists, which intensifies competition among steel mills. Steel mills have to reduce prices to maintain market share, further weakening profits. The recent anti involution market has helped alleviate the downward trend in stainless steel brand prices, but the reversal of the market still requires confirmation of fundamental improvements. Looking ahead to the future, there will still be significant profit pressure on steel mills in the short term. Due to weak market demand and fierce price competition, the profitability of stainless steel mills may continue to be under pressure in the short term.

Stainless steel: production capacity continues to fall, production stoppage is relatively small, and the industry is facing significant pressure
Firstly, there is the expansion of production capacity, with an annual increase of approximately 5.5 million tons. For example, Cangzhou Lingang has about 1 million tons of stainless steel, Guangxi Hongyi New Materials has 1 million tons of stainless steel project, Shandong Taigang Xinhai has 1.75 million tons of stainless steel project, Fujian Qingtuo has 1.7 million tons of stainless steel project, and Zhejiang Jiaxing Dongfang Special Steel has 2.5 million tons of stainless steel. Despite an increase in production capacity, steel mills suspended production for maintenance of approximately 360000 tons in June and July due to weak stainless steel consumption. The relatively small proportion of maintenance efforts compared to new production capacity has little impact on the market support, and the pattern of weak fundamentals has not changed.
Refined nickel: Although profit costs are inverted, production capacity remains unchanged
The cost profit of the industrial chain continues to invert. The production process of outsourced raw materials continues to suffer losses, while the integrated production process also experiences losses, leading to a deterioration in fundamental profitability. The core contradiction of the inverted profit of refined nickel lies in the rigid increase of overseas costs and the weak operation of downstream prices due to oversupply and weak demand. Firstly, the implementation of tax rates in Indonesia's nickel industry chain directly increases the import cost of nickel raw materials. According to Steel Union's calculations, the cost increase for different enterprises in the industry chain varies, with nickel ore rising by 1-1.2 US dollars per wet ton, and nickel iron and ice nickel rising by 10-15 yuan per nickel. Therefore, the increase in cost rigidity will compress the profit cost of domestic nickel enterprises. Secondly, on the downstream end, the nickel industry is facing significant pressure to reduce inventory and optimize production capacity, resulting in an overall downward trend in refined nickel prices and a reduction in production profits.
However, due to recent advances in MHP wet smelting technology (saving 20000 yuan/ton), overseas wet smelting enterprises can directly obtain low-cost raw materials from overseas, and the cost of nickel enterprises has dynamically decreased. At the same time, driven by new energy power batteries, nickel companies have continuously increased their capital investment, maintaining high operating rates, leading to the contradiction of "profit contraction and capacity expansion" in the nickel industry chain.
Overseas export performance is impressive, driving the growth of exports such as stainless steel and refined nickel
The performance of stainless steel foreign trade remains strong this year, with a significant growth rate. The main reason is that the industrialization process in Asia has increased the demand for stainless steel, while the annual price of stainless steel in China is relatively low, and the industry has strong cost competitiveness, leading to continuous growth in exports. China's stainless steel exports are mainly concentrated in Asia and some European/Middle Eastern regions, although these countries occupy the main market share, with the top five exporting countries accounting for about 40%. However, this proportion has decreased compared to the same period last year, and the stainless steel export market is gradually becoming diversified.
The net export volume of domestic stainless steel in the first six months was 1.6726 million tons, an increase of 415600 tons year-on-year, with a growth rate of 33.1%. From the perspective of export countries, Asia is an important stainless steel export country in China. The top five countries in terms of cumulative stainless steel exports are Vietnam, Russia, South Korea, Türkiye and Taiwan, China, accounting for about 35% of the top five exports, down from the same period last year.
Although there have been changes in overseas tariffs and geopolitical risks, especially in the future where the United States may still impose universal tariffs on stainless steel imports from China, the direct export volume of stainless steel to the United States has almost returned to zero. At present, domestic stainless steel exports are mainly in Asia and some emerging market regions. With the acceleration of industrialization, the demand for stainless steel may continue to grow. At the same time, stainless steel is at a low price in recent years, and its cost competitiveness has improved. Therefore, stainless steel exports may still maintain a high level.
Overseas exports have increased significantly, and global supply has grown year-on-year
The supply of wet process intermediates and nickel sulfate from overseas is accelerating, and domestic nickel electroplating enterprises are leveraging the abundant supply capacity of overseas nickel raw materials to accelerate their ascent. Nickel supply has shifted from shortage to sustained surplus. The cumulative production of refined nickel in China in the first six months was 210300 tons, while the cumulative export volume of refined nickel in China during the same period was 142000 tons, driving a continuous increase in global inventories. According to the latest LME registered warehouse receipts by country in June, the inventory of refined nickel from China has risen from 80000 tons this year to around 120000 tons. LME inventory also increased from 160000 tons to 200000 tons during the same period. Therefore, most of the overseas exports of refined nickel have been transferred to LME exchange inventories, indicating that the global physical demand for refined nickel has not been reversed, and domestic production capacity is accelerating, resulting in oversupply. Nickel companies are turning to large-scale exports to alleviate domestic inventory pressure in order to digest excess production. Overall, under the significant accumulation of overseas warehouse receipts, high inventory pressure has consistently suppressed nickel prices.

Looking ahead to the stainless steel and refined nickel markets in the second half of the year, the current maturity structure is flat, with insufficient far month premiums and a relatively low basis, indicating that the market's expectations for the future are still weak. The main reason why stainless steel and Shanghai nickel remain weak under strong expectations is the persistent contradiction between insufficient consumption and capacity expansion. The continuous release of nickel iron and MHP production capacity in Indonesia stimulates the production of downstream domestic manufacturers. The Indonesian government has increased the approved nickel ore quota for RKAB by up to 364 million tons. With the further increase of nickel ore quotas in Indonesia, the supply contradiction has intensified, and the market needs to price this excess news. But the pessimistic fundamentals cannot ignore the positive macroeconomic policies. The anti involution rectification shows the government's determination to control "price deflation". Under absolute valuation, the rebound strength of the market cannot be ignored