Market review this week:
CITIC steel index closed at 181522 points, down 0.77%, outperforming the CSI 300 index by 1.37pct, ranking 14th in the list of gains and losses of CITIC primary sector.
Analysis of key areas:
The epidemic has disturbed the supply and demand pattern, and the total steel inventory has accumulated against the trend. This week, the national blast furnace operating rate and weekly steel output rebounded as scheduled. The utilization rate of ironmaking capacity of 247 steel mills in China rebounded to 85.4%, with a month on month increase of + 3.6pct and a year-on-year increase of – 2.9pct. The weekly output of China’s five major varieties of steel increased to 9.716 million tons, with a month on month increase of + 1.8% and a year-on-year increase of – 7.8%. Recently, the steel mills in Hebei and Shandong have been significantly affected by logistics control measures, and the maintenance of blast furnace stuffing has increased gradually, Next week, the increase of blast furnace capacity utilization rate may slow down for a short time. On the 24th, Tangshan again issued the document of handling passes for key enterprises, and the shortage of raw materials in local steel mills is expected to be gradually alleviated; In terms of inventory, the social inventory fell seasonally to 17.083 million tons this week, with – 0.9% month on month and – 17.4% year-on-year. The weekly decline of social inventory narrowed significantly. With the acceleration of the resumption of production of steel mills, the inventory of steel mills of five major steel varieties increased to 6.372 million tons this week, with + 2.6% month on month and – 28.3% year-on-year. Affected by this, the total inventory of steel bucked the trend and accumulated 12000 tons this week, which was contrary to the seasonal law. At present, the weakness of demand side is still increasing; The apparent consumption of steel after the summary of output and total inventory data increased slightly to 9.704 million tons this week, with a month on month increase of + 0.9% and a year-on-year increase of – 17.9%. According to the lunar calendar, the apparent consumption of the five varieties continued to be weak, of which the consumption of rebar decreased by 32.5% year-on-year. This state may be due to the weak demand related to real estate, and is also related to the recent epidemic prevention and control policies; Affected by the epidemic prevention and control measures, the steel trade in some areas of Hebei, Shandong, Jiangsu, Anhui and Guangdong has been affected recently. The average daily trading volume of building materials fell again to 150700 tons this week, with a month on month ratio of – 8.2%. The trading volume once fell below 150000 tons in the middle of the week, and the trade demand, including speculative demand, continued to slow down; This week, the spot prices of iron ore and coke strengthened simultaneously with the finished products. The spot gross profit of mainstream steel is still in the low profit range, and the gross profit of raw materials lags behind for three weeks. The profit of electric furnace is in a state of loss due to the high scrap price, and the capacity utilization rate of electric furnace may continue to fall. 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”. Under the guidance of the current “steady growth” policy, the contraction effect of the policy of reducing crude steel production and the result that it may boost the strength of steel prices 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, the profit of steel enterprises has also improved significantly compared with the beginning of 2021, and the necessity of continuing to reduce is not strong. Even if the output of crude steel is limited in the later stage, the lower output from January to February also provides space for increasing production. After the end of the limited production coverage period in the heating season, the increasing production trend of steel mills has been verified, while the demand in the peak season continues to be weak, and the supply expansion may prevail;
Weak reality is fully priced, and the steady growth orientation is expected to be poor. At present, the rolling P / E ratio of CITIC iron and steel index is only 8.3 times, which is near the lowest level in two years, and it is also a long-term low level. The current steel spot price is strong against the trend, which is significantly deviated from the downturn of the steel sector. On the one hand, it is due to the expected fermentation of steel plant production since the beginning of the year, the significant increase of coal coke, iron ore and other raw materials, which suppresses the profit per ton of steel, and the stock price is under pressure. On the other hand, The rising valuation of steel enterprises needs the logic of sustainable profit rise, while the futures and spot mainly reflect the results of short-term supply and demand fluctuations; We believe that the negative impact of weak reality on the valuation of the sector may have been fully priced by the market, and the strong steel price deviating from the weak reality is reflecting the consistent good expectation of the main line of steady growth. With the passage of time, the demand reversal brought by the main line of steady growth is expected to make the expected difference in the valuation of the sector, and there is a large room for the valuation of the industry to be repaired; Recently, with the positive attitude of the financial commission, the China Banking and Insurance Regulatory Commission, the central bank and other relevant departments to maintain stability, combined with the loose adjustment of housing loans and development loans in many places, the policy side is expected to promote the virtuous circle of the real estate industry, pay attention to the possibility of the end of long material demand in the second quarter, and focus on the high elastic targets with great growth potential in the demand of long materials in the downstream in combination with the development of infrastructure investment;
The processing target is still the first choice, and the high growth of pipe or infrastructure is expected. In the context of weak demand for ordinary steel, the target of stainless steel processing still has significant comparative advantages. The business model of setting production by sales and high growth characteristics have become the basis for driving stable and upward profits, and the characteristics of technical barriers of processing track 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 steel mills continue to expand production, 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 stable growth in the near future, the allocation value of the steel sector in the valuation depression has increased significantly. Among them, the leading stocks with undervalued value and high dividend yield deserve special attention. It is suggested to pay attention to the long-term material target Fangda Special Steel Technology Co.Ltd(600507) ; Keep pace with the high valuation of the target: . In addition, Xinxing Ductile Iron Pipes Co.Ltd(000778) which has significantly benefited from the transformation of urban pipe network also deserves 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
