Weekly comments on the steel industry
There is no need to worry about the decline of steel price. Strong supervision helps the industry to stabilize and grow.
Steel prices fell slightly this week. Compared with last week, thread fell 90 yuan, hot rolling fell 170 yuan, cold rolling fell 40 yuan and medium and heavy sector fell 60 yuan. The recent decline in steel prices is not due to the weakening of supply and demand, but mainly due to the collapse of the cost of raw materials such as iron ore. in fact, in this round of black correction, the performance of finished products is stronger than raw materials, and the profit of smelting and processing continues to widen. According to our model evaluation, on February 18, the profit cycle to cycle ratio of thread, hot rolling, medium and heavy sector and cold rolling increased by 117 yuan, 46 yuan, 143 yuan and 161 yuan respectively to 541 yuan, 512 yuan, 459 yuan and 458 yuan.
Vertical comparison shows that the profitability of steel is at a historical high in the same period in recent five years. From the average profit model of cost lag of 30 days closer to the business cycle of steel enterprises, as of the end of this week, the average profit of 2022q1 was 688 yuan for thread, 741 yuan for hot rolling, 643 yuan for medium and heavy sector and 731 yuan for cold rolling, with a year-on-year increase of 445 yuan, 400 yuan, 428 yuan and 203 yuan respectively. We believe that the high year-on-year increase in the profits of steel enterprises in 2022q1 will be a high probability event. The Q1 quarterly report of steel enterprises may exceed the expected performance. On the one hand, the production restriction in the heating season of 2 + 26 cities this year is measured by the output of crude steel, which has a more direct impact on the supply. Combined with the stricter air quality control of the Beijing Winter Olympic Games, the low supply state will continue until the end of the first quarter; On the other hand, driven by the steady growth policy, infrastructure investment in the next quarter is expected to be large, and the overall market supply and demand pattern is better than that in the same period last year. The steel stock accumulation rate in the 12 days after the Spring Festival this year is 225000 tons / day, lower than 294000 tons last year, and the thread stock is the lowest in the same period in recent years. Recently, the decision-making level has a clear and decisive attitude in cracking down on hoarding and driving up prices in the iron ore market, and measures emerge one after another, and hit the key directly. In the long run, the rational return of raw fuel prices such as iron ore and coal is conducive to promoting the sound development of the industry. Different from the profit expansion structure of “steel mine take-off” last year, the profit expansion structure of “mine pressure” this year is better and sustainable, which will greatly alleviate the pressure of terminal cost, reduce capital occupation and promote the effective release of demand.
The supply quality is improved, and the growth of special steel new materials is strong.
Recently, the Ministry of industry and information technology and other three departments jointly issued the guiding opinions on promoting the high-quality development of the iron and steel industry, which proposed that the industry should “adhere to the total amount control”, “strictly implement the capacity replacement policy” and “prohibit new iron and steel capacity”. Under the total supply constraint policy, the development of the industry will change to optimizing the stock structure and improving the supply quality. From the perspective of industrial structure, the coordinated development of upstream and downstream industries in the future will help enhance the competitive advantage of the industrial chain. The acceleration of industrial merger and reorganization and the improvement of concentration will optimize the allocation of industrial resources, enable enterprises to reasonably arrange production and maintenance, increase supply flexibility, shorten supply adjustment cycle, match demand changes faster and avoid severe market fluctuations, Maintain the stability of enterprise profits. “Accelerate the promotion of product quality improvement and upgrading” and seek breakthroughs in the development direction of strategic emerging industries, key high-end equipment, core parts and other special steel new materials, which will better improve the supply quality and cultivate “single champion” enterprises in the subdivided field. The subdivided field of special steel new materials has long-term growth.
The total demand is stable, the profit growth of the industry is diversified, and the profit center moves upward.
Recently, the market lacks confidence in steel demand due to the phased downturn of real estate investment. From the change trend of urbanization rate and apparent consumption of crude steel, we think there is no need to worry too much. In the past three years (2019-2021), China’s apparent consumption of crude steel has remained at about 980 million tons. In 2021, China’s urbanization rate was 64.72%, which is still a certain gap compared with 82.66% in the United States, 91.78% in Japan, 83.9% in the UK and other developed countries. Referring to the development experience of the United States and Japan, when the urbanization rate is less than 70% and the average annual growth rate is 0.5% – 1%, the compound growth rate of steel production (consumption) is 2.6% – 4.7%. At present, China’s urbanization rate is not high. The average annual growth rate from 2017 to 2021 is 0.89%, which is still in the growth stage.
Therefore, in the medium-term dimension, China’s steel demand will remain high. At the same time, considering the “high-quality development of the construction industry” (the national steel structure consumption in 2025 may be increased from 89 million tons in 2020 to 150 million tons) and the “improvement of the global competitiveness of China’s manufacturing industry” brought by the “engineer bonus”, we estimate that the indirect export of steel may reach 119.4 million tons in 2021, plus the direct net export of steel 52.65 million tons, the total export of steel will reach 172 million tons, With the improvement of China’s opening-up level and the acceleration of manufacturing products to the sea, the total export volume of steel is still likely to increase in the future (indirect export dominated by mechanical and electrical products will increase). In terms of structure, during the “14th five year plan” period, China will optimize its economic structure and accelerate the transformation and upgrading of manufacturing industry, and put forward higher requirements for iron and steel materials. The demand side is gradually moving towards high-end and customization. The industry is subdivided, the profit growth is diversified, and the profit model is also changing from single sales products to customer-centered service manufacturing, This also brings higher premium space for corporate brands, and then thickens corporate profits.
General steel investment suggestions:
With the increase of industrial concentration and the superposition of supply constraints, the iron and steel industry has changed from strong cycle to weak cycle, the profit center of the industry has moved upward and the dividend proportion has gradually increased. In the long run, the main driver of the demand side of the iron and steel industry will turn to manufacturing. It is suggested to pay attention to the subject matter of underestimated value and high score HONGPU steel (see the attached table). In addition, the general secretary instructed that during the 14th Five Year Plan period, the pipeline transformation and construction must be taken as an important infrastructure project, and the relevant subject matter may benefit in the future.
Investment suggestions for special steel new materials:
Special steel is different from ordinary steel and belongs to an industry strongly supported by policies. There is “import substitution” in China’s medium and high-end special steel new materials and “global share increase” outside. At present, the proportion of medium and high-end special steel in China is about 4%, which is still quite different from that in Japan, Europe and other developed countries. China’s medium and high-end manufacturing industry is developing rapidly, and the demand for medium and high-end special steel is expected to usher in rapid growth, The valuation of medium and high-end special steel enterprises is expected to be further improved. From the valuation of special steel companies in Japan, Hong Kong and the United States, they are mostly at a high level of 15-25 times. The rapid development stage of special steel in Japan, Europe and the United States has passed, while China’s medium and high-end special steel is still in the growth stage and should enjoy a certain valuation premium. It is suggested to pay attention to: Citic Pacific Special Steel Group Co.Ltd(000708) , Zhejiang Jiuli Hi-Tech Metals Co.Ltd(002318) , Tiangong international, Yongxing Special Materials Technology Co.Ltd(002756) , Fushun Special Steel Co.Ltd(600399) , etc.
Risk analysis: the demand for steel is less than expected, and the price of raw materials rises sharply.
