What are the reasons for the price increases in raw materials such as steel?

Here is the English version of the analysis on the drivers behind the recent steel price surge.

Steel Price Surge Driven by Five Interlocking Factors: Tight Supply-Demand, Policy Constraints, Cost Push, Export Boom, and Market Sentiment
The upward trend has been particularly pronounced since April 2026.

I. Supply Side: Persistent Contraction, Growing Rigidity

• Crude steel output cuts: 2026 crude steel production to be reduced by ~3%, with key regions required to cut no less than 15%. In April, key steel mills’ daily crude steel output fell 4% YoY – a clear supply inflection point.

• Environmental & carbon constraints: Under dual‑carbon goals, tighter standards (energy saving, ultra‑low emissions, differential power pricing) raise compliance costs, accelerate exit of small/mid mills, and reduce supply elasticity.

• Voluntary output controls: After weak profitability in 2025, mills proactively control production and schedule more maintenance; inventories stay low (in April, stocks of five major steel products down 23.1% YoY).

II. Demand Side: Domestic & External Rebound Exceeds Expectations

• Domestic infrastructure picks up: 2026 sees RMB 4.4 trillion special‑purpose bonds and RMB 1.3 trillion special treasury bonds; infrastructure investment up 8.9% YoY, driving strong demand for steel in construction machinery and steel structures.

• Manufacturing recovery: Robust demand from new energy, shipbuilding, wind power, offshore engineering – hot‑rolled coil leads the price rise; April manufacturing steel demand up 12% YoY.

• Export surge: Jan–Mar steel billet exports +28.99% YoY; March alone +48.37%. Solid orders from Southeast Asia and the Middle East, some booked through July, diverting supply away from domestic market.

• Modest real estate improvement: Delivery guarantees, urban village redevelopment, and affordable housing underpin construction steel demand.

III. Cost Side: Higher Raw Material & Energy Prices

• Coke / coking coal price hikes: Since April, two rounds of coke price increases, cumulative +RMB 100–110/t; coking coal also rises, adding ~RMB 50/t to steel production costs.

• Iron ore stays elevated: Restricted overseas mine shipments; Qingdao Port PB fines at ~RMB 790/t, a 22‑month high, providing strong cost support.

• Higher energy & logistics costs: Rising international oil prices push up domestic diesel and freight rates; together with higher electricity costs for steel mills, further lift steel prices.

IV. Policy & Macroeconomy: Pro‑Growth Stance + Easy Liquidity

• Fiscal expansion: 2026 fiscal expenditure at RMB 30 trillion, deficit ratio 4%, large‑scale special bonds and special treasury bonds – strongly supporting infrastructure and manufacturing investment.

• Monetary easing: Moderately loose policy; rate‑cut and RRR‑cut expectations rise; ample liquidity boosts commodity prices.

• Rising inflation expectations: PPI stabilises and edges up; market expectations of industrial inflation rise, lifting steel price valuations.

V. Market Sentiment & Inventories: Low Stockpiles + Bullish Outlook

• Inventory destocking continues: Steel inventories fell in April to near decade‑lows; supply‑demand structure tightens, making prices prone to rise.

• Post‑holiday restocking: After Labour Day, construction sites and processing plants restock intensively, releasing short‑term concentrated demand, while bullish sentiment drives prices higher.

• Speculative inflow: Strong long sentiment in futures markets spills over to spot prices.

Conclusion

The steel price surge reflects a confluence of supply contraction, demand recovery, cost push, policy easing, and sentiment‑driven effects. The trend is unlikely to reverse in the short term, and prices will likely remain high with volatility.

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