Market review this week:
CITIC steel index closed at 182936 points, down 4.38%, underperforming the CSI 300 index by 3.44pct, ranking 30th in the list of gains and losses of CITIC primary sector.
Analysis of key areas:
Steel production picked up as scheduled, and the momentum of weak demand in the peak season continued. This week, the national blast furnace operating rate and weekly steel production picked up as scheduled. The utilization rate of ironmaking capacity of 247 steel mills in China rose to 81.9%, with a month on month increase of + 2.1pct and a year-on-year increase of – 5.3pct. The weekly output of China’s five major varieties of steel increased to 9.548 million tons, with a month on month increase of + 2.1% and a year-on-year increase of – 7.1%. With the time point of centralized resumption of production in the limited production areas in the northern heating season, the subsequent capacity utilization rate will rise rapidly; In terms of inventory, the social inventory fell seasonally to 17.232 million tons this week, with a month on month ratio of – 2% and a year-on-year ratio of – 20.4%. However, according to the lunar calendar, the turning down inflection point moved about two weeks later than the conventional time point, indicating that the demand started significantly slower after the year. With the acceleration of the resumption of production of steel mills, the inventory of steel mills of the five major steel varieties increased to 6.211 million tons this week, with a month on month ratio of + 4.8% and a year-on-year ratio of – 32.4%. The current low inventory has a certain support for the steel price, However, it is not driven by the demand side in essence, which has a limited role in boosting prices; The apparent consumption data of steel after the summary of output and total inventory data fell again to 9.621 million tons this week, with – 4% month on month and – 14% year-on-year. According to the lunar calendar, the apparent consumption of the five varieties was significantly weak, of which the consumption of rebar fell by 32% year-on-year. This state may be due to the weak demand for real estate investment and operation, and is also mutually confirmed by the low utilization rate of cement clinker capacity; Affected by the epidemic prevention and control measures, the steel trade and terminal demand in some areas of Hebei, Shandong, Jiangsu, Anhui and Guangdong have been affected recently. This week, the average daily trading volume of building materials fell again to 164100 tons, down – 8% month on month. The trading volume once fell below 150000 tons in the middle of the week, and there are signs of continued slowdown in trade demand, including speculative demand; Affected by the fact that the price of iron ore and coke is stronger than that of finished products, the immediate gross profit of mainstream steel fell back to the low profit range, the raw materials lagged behind for three weeks, and the gross profit also decreased slightly. At present, the profit level of the steel plant is in the middle position, and the steel plant still has the power to expand production. We believe that it is unlikely to introduce the policy of continuing to reduce crude steel production in 2022. On the one hand, the background of crude steel reduction in 2021 is “dual control of supply and demand”. In the second half of the year, the policy tightening for real estate is accompanied by the simultaneous decline of steel production, and the overall steel price shows a weak operation trend. Under the guidance of the current “stable growth” policy, The contraction effect of the policy of reducing crude steel output and the result that may boost the strength of steel price are not conducive to the steady-state operation of downstream infrastructure and other steel industries; On the other hand, the current iron ore price is still in the low position of the fluctuation range in the past two years, and the profit of steel enterprises has also significantly improved compared with that at the beginning of 2021. Under this background, the necessity of continuing to reduce is not strong. Even if the crude steel output in the later stage is limited to a certain extent, the lower output from January to February also provides more space for increasing production in the first half of the year, and the steel plant may increase production after the end of the limited production coverage period in the heating season, This judgment is also confirmed by the fact that the current price trend of the raw material end is stronger than that of the finished product in the near future. The expected difference is more between the output increase intensity and the demand intensity from March to May. The demand in the peak season remains to be verified, and the supply end expansion may prevail;
Valuation depression, the allocation value of steel sector appears under the expectation of steady growth. This week, the financial stability and Development Commission of the State Council held a special meeting. The meeting once again mentioned that “actively introduce policies beneficial to the market and prudently introduce contractive policies”, give clear policy guidance to the market and further strengthen the expectation of the introduction of stable growth policies. Subsequently, the financial commission, the China Banking and Insurance Regulatory Commission, the central bank and other relevant departments actively expressed their attitude to maintain stability, and will study and put forward effective countermeasures to prevent and resolve real estate risks in a timely manner, Combined with the loosening of real estate policies in many places in the early stage, the subsequent policy adjustment will help improve the medium and long-term land acquisition and commencement expectations of real estate enterprises, so as to improve the demand for long materials in the downstream. There is generally a time lag of more than half a year from sales to commencement. Pay attention to the possibility of the bottom of real estate related steel demand in the second quarter, and focus on high elastic targets; At present, the rolling P / E ratio of CITIC iron and steel index is only 8.2 times, which is the lowest level in two years and a long-term low level. We believe that the overall production capacity of the iron and steel industry is controlled or become an access barrier. With the implementation of the stable growth policy in the later stage, the demand side is expected to continue to warm up, the industrial configuration value appears, and the valuation still has room for upward repair..
The processing target is still the first choice, and the high growth of pipe or infrastructure is expected. In the context of cyclical fluctuations in the industry, stainless steel processing targets still have significant comparative advantages. The characteristics of setting production by sales and high growth have become the key factors driving stable and upward profits, and the characteristics of technical barriers of processing tracks can also effectively support the valuation premium; In addition, projects related to urban pipe network reconstruction may become an important part of infrastructure projects, and the related targets of water supply and drainage and gas pipelines are also expected to benefit from the high growth of infrastructure investment.
Investment strategy. The short-term expansion of steel mills continues, and the industry is facing a tug of war between the intensity of production increase and the intensity of demand. The demand in peak season remains to be verified. With the further strengthening of the expectation of steady growth this week, the long-term allocation value of the steel sector in the valuation depression appears, among which the leading stocks with undervalued value and high dividend yield deserve special attention; Stick to the processing track, be optimistic about the subject matter with both technical barriers and high growth characteristics, or usher in the simultaneous rise of valuation and profit. It is suggested to pay attention to: Zhejiang Yongjin Metal Technology Co.Ltd(603995) , Zhejiang Jiuli Hi-Tech Metals Co.Ltd(002318) . In addition, Fangda Special Steel Technology Co.Ltd(600507) , the long-term material subject with high dividend yield, and Xinxing Ductile Iron Pipes Co.Ltd(000778) which has significantly benefited from the transformation of urban pipe network also deserve long-term attention.
Risk tip: China’s output regulation policy exceeded expectations, downstream demand was less than expected, and raw material prices rose more than expected
