According to information from Zhito Finance APP, China Securities Co., Ltd. released research reports, predicting that steel prices will be supported based on current levels by 2025, with overall trends remaining volatile. Under more stringent expectations for production control, the industry's profits are likely to return to positive for the year. On one hand, the arrival of the Federal Reserve's interest rate cut cycle and a series of fiscal and monetary policies in China will further boost market demand, and the control of crude steel production may also provide substantial bullish support to steel prices as it becomes increasingly strict. On the other hand, the return of the Trump administration will have some impact on the export of China's electromechanical products, thus affecting the indirect export of steel products from China. Furthermore, the continuous release of global iron ore production capacity in the coming years will also weaken the cost support on the raw material side, potentially dragging down steel prices.

Main viewpoints of Zhongxin Jiandao are as follows:

Price: Future fluctuations driven by policy.

Since the end of September, confidence in future demand boosts has significantly increased with the holding of multiple meetings and the announcement of various policies, reflected in a noticeable increase in prices.

Looking ahead, on one hand, the arrival of the Federal Reserve's interest rate cut cycle and a series of fiscal and monetary policies in China will further enhance market demand, and the control of crude steel production may provide substantial bullish support to steel prices as it becomes increasingly stringent. On the other hand, the return of the Trump administration will have some impact on the export of China's electromechanical products, thereby affecting the indirect export of steel products from China. Moreover, the continued influx of global iron ore production capacity in the next few years will also weaken the cost support on the raw material side, potentially dragging down steel prices. Overall, it is expected that steel prices will be supported based on current levels by 2025, with overall remain volatile.

Supply: Strengthen production control.

On May 23, 2024, the State Council issued the "2024-2025 Energy Saving and Carbon Reduction Action Plan". The plan emphasizes strict enforcement of steel capacity replacement and prohibits the addition of new steel capacity under the guise of machining, casting, and alloy. It aims to prevent the resurgence of "rebar steel" capacity. A review of related policies issued by central and local authorities indicates that the current focus of the steel industry development is primarily on three points:

(1) Continue to implement crude steel production regulation, prohibiting the addition of new steel capacity under the guise of machining, casting, and alloy.

(2) Vigorously develop high-performance special steels and other high-end steel products, promote the recycling of scrap steel, and support the development of electric arc furnace short-process steelmaking.

(3) Accelerate energy-saving and carbon reduction transformations in the steel industry, strengthening the demonstration and application of low-carbon smelting technologies such as hydrogen metallurgy.

The "2024-2025 Energy Saving and Carbon Reduction Action Plan" issued by the State Council clearly states that "in 2024, crude steel production regulation will continue to be implemented," but the total reduction has not yet been announced. According to the energy-saving and carbon reduction action plan, the energy-saving target for the steel industry from 2024 to 2025 is 20 million tons, with a carbon dioxide reduction target of approximately 53 million tons. Based on the 557 kilograms of standard coal used per ton of steel calculated from the China Iron and Steel Association member companies in 2023, this is equivalent to a required reduction of 35.9 million tons of output in 2024-2025, averaging a reduction of 17.95 million tons per year. According to this guidance, it is expected that crude steel production will be 1.008 billion tons and 1.005 billion tons in 2024 and 2025, respectively.

Demand: Steel for manufacturing has reached a new high.

For a long time, the amount of steel used in China's manufacturing industry has stabilized at around one-third of total steel consumption. However, in recent years, with the adjustment of China's economic structure, the demand structure for steel has also changed. By 2023, the proportion of steel used in manufacturing has reached nearly 40%. Since the beginning of this year, the Ministry of Finance has indicated that it will intensify the counter-cyclical adjustment of financial policy, promoting sustained economic recovery through increased fiscal expenditure and optimized tax incentives. The auto, shipbuilding, and home appliance sectors have maintained last year's high growth rates while the new steel demand created by new energy under the dual carbon goals, along with direct and indirect exports, has addressed the temporary surplus challenges brought about by the real estate cycle.

Looking towards the future, going abroad remains an important way to resolve supply and demand conflicts. Currently, the global economic growth rate is slowing, geopolitical tensions are ongoing, and great power competition is becoming increasingly intense, while extreme weather events are frequent, all of which have constrained demand. The capacity expansion in emerging economies such as the Middle East, India, Southeast Asia, and Latin America may exacerbate global steel supply-demand imbalances. However, China's steel industry has a strong competitive advantage. With the continued promotion of the belt and road initiative concept, it is not overly pessimistic about next year's steel exports. Considering that this year's export baseline is relatively large, it is expected that next year's net steel exports will decrease by 8% year-on-year, with indirect exports remaining at the same level as this year.

Profits: With a significant reduction in supply, profits are expected to recover in 2025.

In recent years, there have been many policies surrounding the control of total crude steel output. However, the execution effect has been poor, and the profitability of steel mills once dropped to a low of 3%. For most of this year, over half of the steel mills reported losses. As we enter 2025, macro policies are expected to continue to exert pressure and translate into physical quantities. Monetary policy is being continuously tightened, and the central government has clearly stated that the real estate industry is stabilizing after a decline. Local hidden debts are being effectively resolved, and the scope of replacement policies is expected to expand. The Ministry of Finance has also released positive signals for fiscal policy. Under stricter expected production controls, the industry’s profits are expected to recover for the whole year. Taking rebar as an example, the average annual gross profit is expected to reach 150 yuan/ton.

Investment evaluation and recommendations:

General steel: Because general steel products are mainly used in the construction industry, and the current recovery timing of real estate is still unclear, priority can be given to high dividend and high payout companies, as well as leading enterprises in various downstream sectors during asset allocation.

Recommended to pay attention to: Hunan Valin Steel (000932.SZ), Nanjing Iron & Steel (600282.SH), Baoshan Iron & Steel (600019.SH), etc. In the long term, attention can be sustained on the improvement of real estate sales and its impact on construction starts.

Special steel new materials: The special steel industry is strongly supported by policy, and in China, high-end special steel new materials are experiencing 'import substitution,' while also improving 'global market share.'

Currently, China's proportion of high-end special steel is about 4%, which still differs significantly from developed countries like Japan and Europe and the Americas. China's high-end manufacturing industry is developing rapidly, and high-end special steel demand is expected to witness rapid growth. The valuation of high-end special steel companies is likely to improve. Looking at the valuations of special steel companies in developed countries, they are generally at 15-25 times levels. The rapid development phase of special steel in Japan and Europe and the Americas has already passed, while China's high-end special steel is still in the growth phase. Industries such as new energy, shipbuilding, and aviation are in a booming development phase and should enjoy a certain valuation premium.

Continue to pay attention to the main line of special steel in 2025: CITIC Pacific Special Steel Group (000708.SZ), Zhejiang Jiuli Hi-Tech Metals (002318.SZ), Tiangong Int'l (00826), Jiang Su Wujin Stainless Steel Pipe Group (603878.SH), etc.

Risk analysis: Currently, under the complex and severe market conditions, the steel industry is facing numerous difficulties and challenges, with differentiation in the operations of enterprises. Impacted by factors such as the monetary policy shocks in developed economies and persistent inflation pressures, the global financial environment is tightening, trade growth is weak, and both corporate and consumer confidence is declining, posing multiple risks and challenges to economic growth. In recent years, there have been continuous risk events on the raw material supply side, including the dam collapse of vale sa, the ban on australian coal imports, heavy rains in brazil, hurricanes in australia, and energy crises triggered by geopolitical conflicts. With various risk events continuously escalating, raw material prices have been persistently pushed higher, and steel mills, squeezed by both demand and cost pressures, experience extreme compression of profits.