The erosion of steel profits by furnace materials in the bottom cycle of this round is obvious. As production regulation progresses, profit distribution in the industrial chain may change, and pressure on the raw material side is expected to weaken.
The Zhitong Finance App learned that CICC released a research report saying that on May 29, the State Council issued the “2024-2025 Energy Saving and Carbon Reduction Action Plan”, which requires specific energy saving and carbon reduction actions by sector and industry. Among them, the “Plan” puts forward more clear requirements for strengthening the dual control of production capacity and output in the steel industry, deepening the upgrading of the industry's product structure, and speeding up the energy-saving transformation of the industry. The erosion of steel profits by furnace materials in the bottom cycle of this round is obvious. As production regulation progresses, profit distribution in the industrial chain may change, and pressure on the raw material side is expected to weaken. I am optimistic about the gradual recovery of the manufacturing industry. In the context of production control, the supply and demand for steel used in the manufacturing industry is expected to gradually improve, corresponding to the profit cycle or gradual recovery of steel companies, and excess profits can be expected.
In terms of targets, it is recommended to focus on two main lines: 1) Underestimated steel “core assets” with a bottom layout, focusing on Baosteel shares (600019.SH), and it is recommended to focus on Nangang Steel (600282.SH) and Valin Steel (000932.SZ). 2) Leading companies in new special steel materials, focus on recommending Tiangong International (00826), a leading global tool and tool steel leader with high growth, and recommend focusing on stainless steel tube leaders Jiuli Special Materials (002318.SZ), and CITIC Special Steel (000708.SZ).
The “Plan” has a profound impact on the pattern of the steel industry
Strengthen the regulation of steel production capacity and production. The plan proposes to continue to regulate crude steel production in 2024, and reaffirms strict implementation of capacity reduction and replacement, and strictly prohibits additional steel production capacity in the name of machining, casting, ferroalloys, etc. CICC believes that the 24-year production control is a continuation of the industry's production pressure reduction policy in the 21-22 double carbon context, and combined with carbon emissions and environmental performance, the regulation is expected to be more accurate and effective.
Deeply adjust the structure of steel products. Vigorously develop high-end steel products such as high-performance special steels, and strictly control exports of basic raw material products with low added value. The goal is to strive to increase the proportion of electric furnace steel production in total crude steel production to 15% by the end of 2025, and the amount of scrap used to reach 300 million tons. The goal of electric furnace steel ratio and scrap utilization is consistent with the “Opinions on Promoting High-Quality Development of the Steel Industry” in '22.
Accelerate energy saving and carbon reduction transformation in the steel industry. The “Plan” requires that by the end of '25, the steel industry will account for 30% of production capacity above the energy efficiency benchmark level (3.4%/12.9% of production capacity above the blast furnace/converter benchmark level in '22, respectively) and reduce carbon dioxide emissions by about 53 million tons. According to CICC estimates, it accounts for about 2.9% of the total carbon emissions of the industry. Furthermore, by the end of 2023, the steel industry had completed a total of 420 million tons of crude steel production capacity transformation. It still has a workload of more than 400 million tons before the target of “more than 80% of the country's steel production capacity to complete ultra-low emission transformation by the end of 25”. Energy saving and carbon reduction transformation work may be accelerated.
The “Plan” is expected to boost market expectations and underpin industry fundamentals in the medium term
Reduce the elasticity of supply in the industry and improve the excess supply pattern. Currently, there is overcapacity in the steel industry, and the 1Q24 ferrous metal smelting and rolling processing industry's capacity utilization rate is 77.3%. CICC believes that capacity production regulation will reduce the supply flexibility of the industry and drive the rise in product prices and the restoration of profit cycles during the recovery cycle.
The pace of energy saving and carbon reduction transformation may speed up. CICC believes that the “Plan” is expected to accelerate the implementation of carbon reduction guidance mechanisms in the industry. The importance of cash flow and profitability of steel companies is becoming more prominent. In the medium term, it will further accelerate industry differentiation, clearance, mergers and integration, and benefit the core assets of the industry with excessive profits.
Risk factors: Policy implementation results fell short of expectations; real estate sentiment declined beyond expectations; global economy declined at an accelerated pace.