Adjustment form after the high point of the cycle: the steel price hit a record high in 2021, boosted by the contraction of supply and the surge of demand in the first half of the year. With the peak fall of the demand cycle, the steel price and iron ore adjusted significantly in the second half of 2021. The phased force of steady growth in the spring of 2022 may promote the price to continue the oversold rebound since the end of 2021. After the steady growth pulse, the second half of the demand downward cycle may return. In addition, there is a risk of loosening the steel production restriction policy, and the steel price is expected to fall again after the spring. Stage trading opportunities in the industry are mainly concentrated in the first half of the year.
Downward demand has twists and turns: steel demand peaked and fell in 2021q2, driven mainly by the downward trend of real estate. This round of real estate correction is the average return after the six-year real estate boom from 2015 to 2020. This round of adjustment still needs to be completed in terms of time and amplitude. In terms of infrastructure, the steady growth policy is expected to bring a small pulse of infrastructure after the spring, but in the medium and long term, infrastructure will still be restricted by factors such as implicit debt control, land financial contraction and the decline of project return on investment, and the sustainability may be insufficient. The manufacturing industry is expected to be structurally differentiated, capital products may be weak, and consumer products are expected to benefit from the consumption stimulus policy. In terms of external demand, the overseas economic cycle is expected to enter a downward period in 2022, and the total external demand will weaken, but the share of steel exports may increase due to the increase of China's surplus. Judging from the rhythm of 2022, under the background of steady growth, infrastructure may make phased efforts in spring to promote the phased improvement of demand. After the policy pulse in the second half of the year, demand may weaken again. In 2022, we expect the total steel demand to decline by 8%.
New supply cycle: the traditional supply cycle is the capacity cycle, but under the policy environment of strict capacity control, the steel capacity cycle loses flexibility. In recent years, administrative production restriction has a greater impact on the industry. Although it is driven by administrative forces, we believe that it will also be affected by cyclical factors, forming a new supply cycle. In the boom stage of the economic cycle, the pressure of steady growth is small, and the policy has spare power to accelerate the green process of traditional industries through administrative production restriction; In the low period of the economic cycle, steady growth returns to the priority, and the power of administrative production restriction decreases. In fact, from 2018 to 2020, we have experienced a round of administrative production restriction from strict to loose. 2021-2022 may only be a repetition of this new supply cycle.
If there is no administrative production restriction: the impact of administrative production restriction on the annual effective capacity in 2021 is about 11%, exceeding 3% of the decline in demand, driving the profit per ton of steel to rise sharply. The starting points of administrative production restriction may include carbon emission reduction, suppressing the demand for iron ore, reducing energy consumption and air pollution control. The first three may be achieved naturally without administrative production restriction in 2022. Because when demand enters negative growth, output will naturally follow negative growth. At this time, the necessity of administrative production restriction is weakened. In fact, it is difficult to achieve positive growth of steel production in 2022, because in the case of significant negative growth of domestic demand, we must strengthen efforts to occupy overseas shares in order to ensure that the total orders and total output are flat year-on-year. Of course, the fourth starting point air pollution control still needs efforts, but in the case of a significant slowdown in domestic demand, maintaining stable employment growth may become a priority, and the priority of production restriction belonging to contractionary policies may decline. Moreover, after the downward pressure of domestic demand increases, the downstream profits weaken, the employment pressure increases, and the upstream profit transfer is a reasonable redistribution method. Therefore, pay attention to the changes of supply side policies after the Winter Olympics in the first quarter of 2022. If there is no administrative production restriction, the effective production capacity will rise significantly.
Increase in smelting surplus: due to the expected downward demand and loose margin of production restriction, the utilization rate of steel production capacity may fall back to the level of 2016 in 2022, and the profit per ton of steel is under pressure. In terms of the rhythm of the year, at the beginning of the year, due to the fact that North China is still expected to implement greater production restrictions and the force of steady growth, the profit per ton of steel may still be maintained at a high level, but the uncertainty at the supply side increases after the beginning of spring, and the profit per ton of steel is expected to show a trend of high before and low after the beginning of the year. In terms of iron ore, there is still a rigid increase in the four major mines in 2022, while China's iron ore demand is expected to fall to the level of 2018, and the iron ore price center will fall. From the rhythm of the year, iron ore may benefit from steady growth before spring and continue the oversold rebound since the end of 2021.
What are the opportunities for steel stocks after demand peaking: in the long run, after demand peaking does not mean that steel stocks will not have large investment opportunities. As long as the economy still shows cyclical fluctuations, the steel sector can still show greater flexibility in the upward stage of the cycle. Take American steel as an example. In 2008, the share price of American steel fell by more than 90%. In the following ten years, the American steel industry experienced four cycles of ups and downs, and its share price could rise several times in each upward period. Therefore, we can still look forward to the next round of short cycle upward steel beta market.
Investment strategy - seize periodic opportunities: we estimate that the year-on-year negative growth rate of steel demand in November 2021 once reached 20% (calculated by output after inventory correction). The steady growth policy is expected to make the growth rate of steel demand rise periodically, and promote the over fall rebound of steel industry chain prices since the end of 2021. The trading window is mainly in the first half of the year. From the perspective of the supply side, there is great uncertainty in the administrative production restriction of iron and steel after the first quarter. Therefore, under the background of demand repair, the elasticity of iron ore may be better. We can pay attention to iron ore companies Hbis Resources Co.Ltd(000923) , Inner Mongolia Dazhong Mining Co.Ltd(001203) in the first half of the year. From a longer time dimension, after the steady growth pulse in spring, the demand may weaken again. In terms of time and amplitude, this round of real estate downward cycle still needs to be completed. Pay attention to the industrial callback risk in the second half of the year. In the long run, the concentration of ordinary steel industry shows an upward trend, and the industry leader Baoshan Iron & Steel Co.Ltd(600019) benefits from the long-term rise of the industry's bargaining power. In addition, it is suggested to pay attention to some stocks that have the logic of increasing market share or need to benefit from emerging industries, such as Zhejiang Yongjin Metal Technology Co.Ltd(603995) , Zhangjiagang Guangda Special Material Co.Ltd(688186) , Fushun Special Steel Co.Ltd(600399) , Zhejiang Jiuli Hi-Tech Metals Co.Ltd(002318) , Yongxing Special Materials Technology Co.Ltd(002756) .
Risk tips: the uncertainty of real estate under the downward cycle and policy hedging, the risk of overseas economic fluctuation, the uncertainty of steel supply side production restriction policy, and the risk of industry measurement deviation.
