Steel industry: Patiently wait for industry profit to bottom out again

In September, the steel industry outperformed the broader market slightly, and the steel price rose first and then fell.

In September, the steel industry declined slightly by 0.19%, outperforming the Shanghai-Shenzhen 300 by 1.38%. At the beginning of the month, the policy of stimulating steel prices by energy-saving and emission-reduction policies increased by a large margin, but continued to decline in the latter part of the month, a slight increase of 3.3% month-on-month, of which long products rose 4.9% and plates rose 2.0%. However, the ore prices continued to fall in September in the event that supply was adjusted, and at the same time, the estimated gross profit level was improved in September. The social stocks still fell hard in September, and the long stock destocking performance continued to outperform the board.

Although the supply contracted but demand was declining, in October, the industry’s profitability bottomed out again.

The decline in daily production in mid-September shows that supply-side adjustments are finally beginning to play a role, but the continued decline in steel prices reflects the recent possibility of raising interest rates and re-adjusting rumors that caused the market to worry about the risk of a possible end-side decline, at least before The expected demand in the ring is not timely than the seasonal recovery.

The possible downturn on the demand side and the slowing and repeated destocking caused by the increase in steel prices in the previous period may aggravate the industry risks, but the favorable side lies in the fact that the whole industry has low gross profit. The recent drop in steel prices has caused our estimated gross profit level to revert back to near breakeven. This means that no matter how the market outlook is deduced, the bottom line of the profitability of the steel industry has again become the highest probability.

On the one hand, the continued sluggishness of long products in the first half of the year led to a slower growth rate of long products than that of plate materials. From the data in mid-September, the regulation of energy conservation and emission reduction policies has a greater impact on small steel mills and a greater impact on long steel production. On the other hand, despite the risk of raising interest rates and rumors of real estate regulation, from a simple data point of view, the recovery of long products may be relatively better than that of plates, at least compared to the demand for high manufacturing industries. A very important expectation is that if the traditional peak season still exists this year, then the recovery of demand for long products most affected by the season should also be faster than the plate. It is a rational choice to have a higher expectation for long products in the case that the previous period has been worse.

In October, the number of long products with a high proportion of percentages and a large drop in the number of defensive products was concerned.

Judging from the laws of historical statistics, there is no advantage in the relatively large market for the steel industry in October. The current biggest constraint on the entire industry is that the demand may face a decline. Therefore, the allocation strategy in October should be mainly based on defense.

However, the previous decline has been basically reflecting pessimistic expectations. Therefore, considering the comparative advantage of long products relative to sheet and the valuation advantage after the decline, it is recommended to pay attention to the varieties with larger losses in the previous period and relatively higher proportion of long products.

Our recommended October portfolio is Songshan Steel, Bayi Steel and Baosteel.