CITIC Construction Investment: Steel prices will mainly fluctuate in 2025, reinforcing a new supply-demand order under production control

According to the Zhitong Finance APP, CITIC Construction Investment has released a research report stating that steel prices are expected to have support based on the current situation in 2025, with overall fluctuations remaining the main trend. Under the expectation of stricter production control, the industry's profits for the whole year are likely to turn positive. On one hand, the arrival of the Federal Reserve's interest rate cut cycle and a series of fiscal and monetary policies in our country will further boost market demand, and the control of crude steel production may also create substantial benefits for steel prices in an increasingly strict direction. On the other hand, the re-election of the Trump administration will have a certain impact on the export of our country's electromechanical products, thereby affecting the indirect export of our steel. Additionally, the continuous release of global iron ore production capacity in the coming years will weaken the cost support on the raw material side, which may drag down steel prices.

CITIC Construction Investment's main viewpoints are as follows:

Prices: Future fluctuations driven by policy.

Since the end of September, with the convening of multiple meetings and the announcement of various policies, market confidence in future demand recovery has significantly increased, which has also been reflected in a noticeable price increase.

Looking ahead, on one hand, the arrival of the Federal Reserve's interest rate cut cycle and a series of fiscal and monetary policies in our country will further boost market demand, and the control of crude steel production may also create substantial benefits for steel prices in an increasingly strict direction. On the other hand, the re-election of the Trump administration will have a certain impact on the export of our country's electromechanical products, thereby affecting the indirect export of our steel. Additionally, the continuous release of global iron ore production capacity in the coming years will weaken the cost support on the raw material side, which may drag down steel prices. Overall, it is expected that steel prices will have support based on the current situation in 2025, with overall fluctuations remaining the main trend.

Supply: Strengthening production control.

On May 23, 2024, the State Council issued the "2024-2025 Energy Saving and Carbon Reduction Action Plan," which states that strict implementation of steel production capacity replacement is required, and new steel production capacity is strictly prohibited under the guise of mechanical processing, casting, and ferroalloys, to prevent the resurgence of "rebar steel" capacity. From the summary of relevant policies issued by the central and local governments, the current development direction of the steel industry focuses on the following three points:

(1) Continue to implement crude steel production control, strictly prohibiting new steel production capacity under the guise of mechanical processing, casting, and ferroalloys.

(2) Vigorously develop high-performance special steel and other high-end steel products, promote the recycling of scrap steel, and support the development of electric furnace short-process steelmaking.

(3) Accelerate energy-saving and carbon reduction transformations in the steel industry, and strengthen the demonstration and application of low-carbon smelting technologies such as hydrogen metallurgy.

The "2024-2025 Energy Saving and Carbon Reduction Action Plan" issued by the State Council clearly states that "crude steel production control will continue to be implemented in 2024," but the total reduction has not yet been announced. According to the energy-saving and carbon reduction action plan, the energy-saving target for the steel industry from 2024 to 2025 is 20 million tons, with a reduction of carbon dioxide emissions of about 53 million tons. Based on the calculation of 557 kilograms of standard coal per ton of steel for member enterprises of the China Iron and Steel Association in 2023, this is equivalent to a required reduction of 35.9 million tons of production from 2024 to 2025, with an average annual reduction of 17.95 million tons. According to this guideline, the bank expects crude steel production in 2024 and 2025 to be 1.008 billion tons and 1.005 billion tons, respectively Demand: The proportion of steel used in the manufacturing industry reaches a new high.

For a long time, the amount of steel used in China's manufacturing industry has stabilized at around one-third of total steel consumption. However, in recent years, with the adjustment of China's economic structure, the demand structure for steel has also changed. As of 2023, the proportion of steel used in the manufacturing industry has reached nearly 40%. Since the beginning of this year, the Ministry of Finance has stated that it will increase the counter-cyclical adjustment of fiscal policy by expanding the scale of fiscal expenditure and optimizing tax and fee preferential policies to promote sustained economic recovery. The automotive, shipbuilding, and home appliance sectors have maintained last year's high growth momentum, while the new steel demand brought by the dual carbon goals and direct and indirect exports have resolved the phase of excess caused by the real estate cycle.

Looking to the future, going overseas remains an important way to solve the supply-demand contradiction. Currently, the global economic growth rate is slowing, geopolitical tensions are ongoing, major power competition is intensifying, and extreme weather events are frequent, all of which have constrained demand. Meanwhile, the capacity expansion of emerging economies such as the Middle East, India, Southeast Asia, and Latin America may exacerbate the global steel supply-demand imbalance. However, China's steel industry has strong competitive advantages, and with the continuous promotion of the "Belt and Road" initiative, the bank is not overly pessimistic about next year's steel exports. Considering this year's high export base, it is expected that next year's net steel exports will decrease by 8% year-on-year, with indirect exports remaining the same as this year.

Profit: With a significant reduction in supply, profits are expected to recover by 2025.

In recent years, there have been many policies surrounding the control of crude steel production, but the final execution effect has been poor, and the profitability of steel mills once fell to a low of 3%. For most of this year, more than half of steel mills have been in loss. Entering 2025, macro policies will continue to exert force and translate into physical quantities, monetary policies will continue to be strengthened, the central government has clearly stated that the real estate industry has stabilized, and local hidden debts have been effectively resolved. The scope of the old-for-new policy is expected to expand, and the Ministry of Finance has also released positive signals for fiscal policy. Under the expectation of stricter production control, the industry's profits are expected to turn positive for the year. Taking rebar as an example, the average annual gross profit is expected to reach 150 yuan/ton.

Investment Evaluation and Suggestions:

Ordinary Steel: Since ordinary steel products are mainly used in the construction industry, and the current recovery time for real estate is still unclear, when allocating assets, priority can be given to high-dividend, high-return, and leading enterprises in various downstream sectors.

Recommended to pay attention to: Hualing Steel (000932.SZ), Nanjing Steel (600282.SH), Baosteel (600019.SH), etc., and in the long term, continue to focus on the transmission of improved real estate sales to the construction side.

Special Steel New Materials: Special steel is a policy-supported industry, with "import substitution" domestically and "global market share enhancement" externally.

Currently, the proportion of high-end special steel in China is about 4%, which is still significantly lower than that of developed countries such as Japan and Europe and the United States. With the rapid development of China's high-end manufacturing industry, the demand for high-end special steel is expected to grow rapidly, and the valuation of high-end special steel enterprises is expected to increase. Looking at the valuations of special steel companies in developed countries, they are mostly at levels of 15-25 times. The rapid development phase of special steel in Japan, Europe, and the United States has already passed, while China's high-end special steel is still in the growth phase. The industries applying new energy, shipbuilding, and aerospace are in a period of vigorous development and should enjoy a certain valuation premium Continue to focus on the special steel main line in 2025: CITIC Special Steel (000708.SZ), Jiuli Special Materials (002318.SZ), Tiangong International (00826), Wujin Stainless Steel (603878.SH), etc.

Risk Analysis: Currently, under the complex and severe market situation, the steel industry is also facing many difficulties and challenges, with operational differentiation among enterprises. Influenced by factors such as monetary policy shocks in developed economies and persistent inflationary pressures, the global financial environment is tightening, trade growth is sluggish, and both corporate and consumer confidence are declining, leading to multiple risks and challenges for economic growth. In recent years, there have been continuous risk events on the raw material supply side, including the Vale dam collapse, the ban on Australian coal imports, heavy rains in Brazil, hurricanes in Australia, and energy crises triggered by geopolitical conflicts. As various risk events continue to unfold, raw material prices have been persistently pushed higher, and steel mills are experiencing extreme profit compression due to pressure from both demand and costs