According to the Securities Times app, Haitong International released research reports stating that over the past 13 years, steel inventory at circulation, production, and consumption ends has hit new lows, while steel exports will remain at high levels. After the profit rebound, production capacity quickly recovered, and profits fluctuated with the increase in supply. During each bull market, the weighted PB (MRQ) of the steel sector has been more than 1.50 times, leaving room for PB valuation. However, due to the fact that steel consumption in China has passed its peak and crude steel demand will gradually decline like in developed countries, external demand will not be able to fill the domestic demand gap in the short term, with the medium-term challenge still remaining.

Haitong International's main viewpoints are as follows:

Steel inventory at circulation, production, and consumption ends hit new lows.

The inventory data for rebar in 35 cities is relatively long and can be used for comparison. Over the past 13 years, the absolute quantity of this inventory has hit a historical low. In terms of the relative inventory-to-sales ratio, as of November 1, 2024, the ratio of rebar inventory to annual rebar production in 35 cities has also hit a historical low. In addition, steel companies are the production end, with the inventory of the top five steel products hitting a 10-year low. When the total inventory growth rate of the six major steel-consuming industries approaches zero, it often signals the beginning of a new round of restocking, and as of September 2024, the inventory growth rate of these six major steel-consuming industries is approaching zero.

Steel exports will remain at high levels.

In the past two years, when the PMI for the steel industry exports approaches 50, the export volume of steel and steel billets has generally remained above 8 million tons. Due to the decrease in domestic demand and the high supply, steel companies need to export to balance, therefore it is expected to remain at this level or higher throughout the year.

Capacity quickly resumed, profits fluctuate with supply increases.

After the rebound in profits, on November 1, 2024, the daily pig iron production was about 0.09 million tons higher than the average daily production in August and September, with an annualized increase of about 40 million tons of steel production. Assuming exports remain unchanged, production can return to the levels of 2022, or even slightly better. Steel companies have a deadline for pricing steel products, but market prices fluctuate daily. If short-term demand is high, profits rebound; if supply is excessive, profits fall.

There is still room for PB valuation, the mid-term test is ongoing.

During each bull market, the weighted PB (MRQ) of the steel sector is always more than 1.50 times. Based on the closing price on November 1, 2024, the weighted PB (MRQ) of the steel sector is 0.82 times, Baoshan Iron & Steel is 0.74 times, and HBIS Company Limited is only 0.39 times. PB valuations of listed steel companies internationally are higher in the USA and India, not high in Europe, South America, Russia, or Japan and South Korea. Currently, steel consumption in China has passed its peak, and crude steel demand will gradually decrease like in developed countries. At the same time, external demand will not be able to immediately offset the domestic demand gap, leading to increasing profit pressure in the future for the steel industry.

Investment recommendations: Focus on Baoshan Iron & Steel (600019.SH), Nanjing Iron & Steel (600282.SH), Hunan Valin Steel (000932.SZ), citic pacific special steel group (000708.SZ), etc.

Risk warning: Policy risks, external risks, etc.