Guotai Junan: Optimistic about the improvement in demand and the reshaping of supply in the steel industry, with leading competitive advantages gradually increasing

According to the Zhitong Finance APP, Guotai Junan has released a research report stating that steel demand is expected to gradually stabilize by 2025, with supply likely to contract. The firm continues to be optimistic about the improvement in industry demand and supply restructuring, with the competitive advantages of industry leaders gradually increasing. It maintains an "overweight" rating for the steel industry. In the long term, the increase in industry concentration and the promotion of high-quality development are inevitable trends for the future development of the steel industry, and steel companies with product structure and cost advantages will fully benefit; against the backdrop of stricter environmental protection, ultra-low emission transformation, and carbon neutrality, the competitive advantages and profitability of leading companies will become more pronounced.

The main points of Guotai Junan are as follows:

Demand continues to rebound, inventory declines rapidly

Last Friday, the apparent consumption of major steel products was 9.1978 million tons, an increase of 128,300 tons month-on-month; production was 8.695 million tons, an increase of 40,800 tons month-on-month; total inventory was 17.3781 million tons, a decrease of 502,800 tons month-on-month, maintaining the lowest level for the same period in recent years.

The operating rate of blast furnaces in 247 steel mills was 82.11%, an increase of 0.15 percentage points month-on-month; the capacity utilization rate of blast furnaces was 89.08%, an increase of 0.38 percentage points month-on-month; the operating rate of electric furnaces was 64.1%, unchanged month-on-month; the capacity utilization rate of electric furnaces was 50.68%, an increase of 0.14 percentage points month-on-month. During the traditional peak season, supply and demand maintain a dual increase trend, but the growth rate has declined somewhat last week, and total inventory continues to decline rapidly.

Profitability increased month-on-month

Last week, the inventory of imported iron ore in 45 ports was 145 million tons, an increase of 570,000 tons month-on-month, maintaining a high level. The simulated average gross profit of rebar was 254 yuan/ton, an increase of 18 yuan/ton month-on-month, while the simulated average gross profit of hot rolled was 208 yuan/ton, a decrease of 12 yuan/ton; the profitability of 247 steel companies was 53.68%, an increase of 0.43 percentage points month-on-month. Last week, the average prices of both steel and raw materials rebounded month-on-month, and the increase in rebar prices was greater than that of hot rolled, leading to a slight recovery in rebar gross profit.

Looking ahead, the firm expects accelerated production of iron ore and limited demand growth, which may lead iron ore into a loose cycle, improving the cost constraints on steel and restoring the industry's profitability center.

Demand is expected to gradually stabilize, and supply is expected to contract. Looking ahead, the firm anticipates that as real estate policies gradually transmit, the real estate market is likely to stop declining and stabilize, and considering the decreasing proportion of steel demand from the real estate sector, the negative drag effect of real estate on demand is expected to significantly weaken; with fiscal efforts, infrastructure will continue to play a stabilizing role, and manufacturing demand will grow steadily. Overall, the firm expects steel demand to gradually stabilize. On the supply side, the industry has been in loss for nearly three years, with some smaller steel companies experiencing cash flow losses. In 2024, there will be two waves of proactive production cuts, highlighting supply vulnerabilities. The firm anticipates the possibility of further production cuts or even shutdowns on the supply side in 2025; recently, some steel mills in Xinjiang have issued voluntary production cut notices, further enhancing production cut expectations. In terms of policy, on March 13, 2025, the National Development and Reform Commission released a report on the implementation of the national economic and social development plan for 2024 and the draft plan for 2025, proposing "to continue implementing crude steel production control in 2025 and promote the reduction and restructuring of the steel industry." Risk Warning: Supply-side contraction is less than expected, and demand has significantly decreased