Demand is flat against a backdrop of continued supply contraction. We expect overall steel demand to be flat in 2018. The net reduction in steel capacity will continue in 2018 but will be weaker than in 2017, because we expect that in the context of higher overall profits in the steel industry, some blast furnace / EAF steelmaking capacity will enter the market and capacity utilisation of such capacity is likely to continue to rise in 2018. We expect the actual total crude steel production capacity to decline by 41 million tons in 2018, but the impact on steel prices in 2018 will be partially offset by the impact of the new arc furnace capacity during the off-season.
Gross profit per ton continued to rise in 2018. We believe that iron ore prices fell moderately in 2018 due to the continued expansion of international production capacity. This is also a key factor in the expected continued rise in gross profit per ton against the backdrop of high steel prices in 2018.
We expect Xiwang Special Steel's net profit to increase by a further 22.7% in 2018. We believe that the tighter supply and demand situation will continue to catalyze domestic steel prices in 2018. Based on expectations of a modest pullback in raw material prices in 2018, Xiwang Special Steel's profit for fiscal year 2018 is expected to continue to climb.
We think Xiwang Special Steel: 1) compared with its listed companies in Hong Kong, the valuation is greatly discounted, but at the same time it makes a good profit, which makes its valuation very attractive. 2) the potential of rising profits after the production capacity of railway rail products is put into production. 3) the strong earnings flexibility of FY2017 / FY2018 will prove that its valuation has some upside. Based on a price-to-book ratio of 0.70 times 2018, our target price for Xiwang Special Steel is HK $2.25, covering a "buy" investment rating for the first time.