① There was no fundamental improvement in the business situation of the steel industry in 2023. Prices remained high due to lower costs. The traditional real estate cycle was far away, competition for steel used in ordinary manufacturing intensified, and the reshuffle of the industry accelerated. ② Driven by demand from upward cycle industries such as automobiles, new energy, and shipbuilding, it forms strong support for the steel market and drives the upgrading of the overall product structure of the domestic steel industry.
Financial Services Association, May 6 (Reporter Zhang Liangde) China's steel industry is experiencing unprecedented market and structural changes. This is different from the bottom of a single industry cycle in the past 30 years. The current downturn in the steel industry is characterized by multiple cyclical fluctuations and resonates, and the logical basis of the industry has changed greatly.
This industry transformation not only continued for a long time, but also had a strong fluctuation and profound impact. The steel industry has entered a reshuffle involving life and death. In this process of industry reshuffle, which has continued for two years, various steel companies have continued to “roll back” in terms of “savings”, and have achieved “the ultimate” in reducing costs and improving efficiency. However, “open source” is the fundamental way for industry development. Compared with the results of listed steel companies in the first quarter of 2023 and 2024, the gross margin of some steel varieties is higher than the industry level, market demand continues to increase, and some steel companies seize the opportunity to improve their profitability. The future of industry development seems to be becoming more and more clear.
Domestic steel industry reshuffle intensifies
Since 2022, profits in the steel industry have declined, becoming a landmark year for this “new cycle” of steel. Statistics show that profits in the ferrous metal smelting and rolling processing industry fell 91.3% compared to the previous year. The business situation in 2023 did not improve fundamentally. Steel prices continued to drop, while the cost of raw materials such as iron ore and coking coal remained high. Under double pressure, corporate profit margins were extremely compressed. Some heads of large steel companies believe that the current steel industry has entered the “ice age” and is facing a severe competitive situation..
In 2023, steel prices fell year on year. The average value of China's Steel Price Index (CSPI) in 2023 was 111.60 points, down 11.07 points from the previous year, or 9.02%. China's steel industry is showing a trend of “weakening demand, falling prices, high costs, and falling profits”. Since supply is stronger than demand, the actual decline in costs is less than the decline in steel prices, making it more difficult to improve quality and efficiency.
Comparing the business situation of listed steel companies in the past two years, it can be seen that the industry has been divided significantly. Some steel companies continue to lose money and are struggling to survive; there are also steel companies that can stick to their positions and maintain profits; the profitability of a small number of steel companies has broken out of the cycle and is growing.
Revenue and net profit of listed companies in the steel industry for the first quarter of 2023 and 2024 (data source: company announcements, compiled by a Financial Association reporter)
Looking at the performance of listed companies in the steel industry in the past two years, looking at the total profit and loss of 27 steel smelting companies in 2022, the total profit was about 22.2 billion yuan, falling back to about 16.7 billion yuan in 2023. The total profit of these 27 listed companies in the first quarter of this year was negative 1 billion yuan, and the industry reshuffle intensified.
In the face of drastic changes in the business environment, the right people in the industry survive. Steel companies such as CITIC Special Steel, Valin Steel, Hegang Steel Co., Ltd., Hanggang Steel Co., Ltd., and Fangda Special Steel have enabled the company to maintain a good level of profit in this cold winter in the industry.
Some outstanding companies have become more outstanding. Listed steel companies such as Baosteel Co., Ltd., and Fushun Special Steel have remained at the same level as in 2022 and 2023, while profits bucked the trend in the first quarter of 2024. On the one hand, this is a factor in cost changes; on the other hand, it is highly related to the adjustment of the company's products and market structure.
Demand for construction steel continues to decline
The industry knows that the main factor behind the current decline in the steel industry is the decline in the domestic Kuznets cycle. This also reflects changes in the real estate and infrastructure construction industry. Currently, investment, sales, and construction in the real estate market are in a state of contraction, while the infrastructure sector is under the influence of the real estate economy, causing local government financial resources to be constrained and the marginal benefits of investment to decline.
Meanwhile, while demand is declining, domestic steel production remains at a high level of supply. According to data released by the National Bureau of Statistics, in 2023, China's crude steel production was 1019.08 million tons, which is basically the same as the previous year; pig iron production was 871.01 million tons, up 0.7% year on year; steel production was 1362.68 million tons, up 5.2% year on year.
Since supply is stronger than demand, and the actual decline in costs is less than the decline in steel prices, the steel industry is showing a trend of “weakening demand, falling prices, high costs, and falling profits”, making it more difficult to improve quality and efficiency. Although various steel companies have begun extreme management, they are still unable to fundamentally change the company's operating difficulties.
As stated by Shandong Steel (600022.SH) in its annual report forecast, the steel market situation in 2023 is extremely serious. The company actively responds to the downward pressure on the steel market, continues to deepen lean management, deep benchmarking and extreme exploration, strengthen market research and judgment, and closely focus on increasing purchase and sales price differences and strengthening production, purchasing, and sales linkages, but it is still unable to eliminate the impact of drastic market profit cuts.
According to my steel data, the domestic annual consumption of rebar in 2021-2023 was 170 million tons, 150 million tons, and 132 million tons, respectively. The consumption of wire and coil was 76 million tons, 68 million tons, and 55 million tons respectively. The consumption of steel for construction dropped significantly.
Due to the impact of declining demand in the terminal market, the profitability of building materials products is clearly weaker than other products in various steel varieties. Judging from the gross margin situation of Shandong Iron and Steel's segmented products in 2023, the gross margin of plate products is still 10.03%, the gross margin of coil products is 4.52%, the gross margin of steel bar products is only 2.13%, and the profit margin of bar products is -5.58%. The profit margin difference between products is obvious.
Production volume, sales volume and price of various varieties of Nangang Steel Co., Ltd. in the first quarter of 2024 (Image source: company announcement)
As can also be seen from the product structure and price list of Nangang Steel Co., Ltd. for the first quarter of this year, the price trend of construction steel is clearly weak compared to the price trend of other steel varieties, causing a drag on the profits of steel companies.
In this cold steel winter, in addition to the company's own location, management, and financial factors, the product structure has become the main factor in the company's profit and loss.
Steel companies switch production, and the gross margin of steel used in ordinary manufacturing is reduced
As demand for steel for construction weakens, steel companies are also actively converting production. Among them, the proportion of steel consumption in the manufacturing industry continues to rise, but the increase in steel used in traditional manufacturing falls short of the increase in the supply of steel companies. As a result, the overall profit of the steel industry continues to narrow, and the industry's profit situation is close to the bottom of history.
Some media learned from the China Iron and Steel Industry Association that at present, the pace of product restructuring in China's steel industry has accelerated markedly, and the share of steel used in manufacturing has increased from 42% in 2020 to 48% in 2023.
According to my steel data, the average weekly production of construction steel in 2023 was 37.961 million tons, of which the average weekly output of rebar was 2.675,700 tons, and the average weekly output of wire was 1.120,400 tons. The average weekly output of construction steel in 2023 was 35.100,000 tons lower than in 2022. Among them, rebar decreased 172,400 tons year on year, and wire decreased 178,500 tons year on year.
While the total production of steel does not decrease throughout the year, steel companies turn construction steel into coils and plates required by the manufacturing industry. However, the continuous increase in the supply of steel used in the manufacturing industry has also caused steel companies' coil profits to begin to narrow.
Taking Shandong Iron and Steel as an example, the company's gross margin of coil was 17.29% in 2021, down to 7.72% in 2022, and 4.52% in 2023. The gross margin of wire and strip products of Hegang Steel Co., Ltd. also declined significantly. The gross margins from 2021 to 2023 were 10.03%, 8.17%, and 7.61%, respectively.
In addition, according to the financial report of Shougang Co., Ltd., the gross margin of the company's soft magnetic materials (silicon steel) in 2023 was 4.92%, down 6.64 pct from 2022. In response, the company's management stated in its recent research and company performance briefing that there is a clear surplus of ordinary silicon steel products, lowering product sales prices and gross profit margins, while supply and demand for high-end products may be in a tight balance in the future. It is estimated that by 2025, the company's total electrical steel output will reach 2.2 million to 2.3 million tons, and high-end products will account for more than 70% of production.
Market competition for steel for general manufacturing is also gradually intensifying, and steel companies expect that it will be difficult to cope with this round of “cold winter” in the steel industry by switching production from construction steel to steel for general manufacturing.
Prices of high-end steels such as automobiles, new energy, shipbuilding and special steels are stable and demand is strong
In the annual report of Shandong Iron and Steel, the company's management mentioned that in the future, the concentration of China's steel industry is expected to increase further, the scale effect and production efficiency will be further improved, and the industry structure will gradually change. Steel production will also shift from quantity to quality. Reducing costs, improving steel quality, producing varieties with high added value, and improving technological content will become important ways to enhance the competitiveness of steel companies.
The Financial Services Association reporter analyzed the financial reports of several leading listed steel companies and found that since some downstream industries are in their own upward cycles, some varieties of steel companies have maintained good gross margin levels in the cold winter of the industry.
For example, the gross margins of Hegang Steel's plate products from 2021 to 2023 are: 12.59%, 11.08%, and 12.13%; the gross margins of Nangang Steel's special plate products from 2021 to 2023 are 15.68%, 15.37%, and 16.67%; the product gross margins of CITIC Special Steel's special seamless steel pipes from 2021 to 2023 are 15.08%, 17.48%, and 14.12%, respectively. The gross margins of products owned by the above mentioned steel companies have remained high.
Among them, the special plates of Nangang Steel Co., Ltd. are structural steel, marine and offshore steel, energy steel, and construction machinery steel, which are mainly used in high-end markets such as oil and gas equipment, new energy, marine and offshore, automobile bearing springs, construction machinery and rail transit, and elevated bridge structures; while Hegang Steel Co., Ltd. is the second largest supplier of automotive steel in China and the largest supplier of steel for home appliances, and has strong brand influence and market competitiveness in these two markets.
Comparing the high gross margins of these steel companies' high-end steel products with the declining profit margins of traditional steel manufacturing, it also highlights the urgency of transformation and upgrading of the steel industry, as well as steel companies' grasp of downstream cyclical opportunities.
The China Iron and Steel Association predicts an increase in demand for steel for automobiles, home appliances, ships, containers, and energy in 2024 in its report “2023 Steel Market Supply and Demand Situation and 2024 Development Trends”.
Among them, benefiting from the booming NEV market, the automobile industry is expected to reach a new high of about 61 million tons of steel consumption in 2024, achieving a year-on-year increase of about 3%; with the opening of a new upward cycle in the shipbuilding industry, the domestic shipyard's volume of construction and handheld orders, and a steady or slight increase in new orders, the shipbuilding industry is expected to reach about 17.8 million tons of steel consumption in 2024. It is also estimated that there will be an annual growth rate of about 3%; in the energy sector, a new round of Kangbo electricity demand cycle will begin to drive a new round of Kangbo electricity demand There has been growth, domestic The acceleration of construction of UHV transmission projects and new energy facilities has boosted the increase in demand for electrical equipment. At the same time, the market share of superimposed new energy vehicles continues to rise. Demand for electrical steel is expected to increase steadily to 13.4 million tons, and will also achieve an increase of about 3%.
Since the cycles of the above industries are all long-wave cycles, it is expected that the development of these industries will strongly support the steel market and drive the upgrading of the overall product structure of the domestic steel industry.
Strengthen overseas market development
Compared with the domestic market, where the internal market continues to deepen, the performance of domestic steel companies in overseas markets is more competitive, and many steel companies' exports rose sharply in 2023.
Baosteel's overseas market sales in 2023 were 49.06 billion yuan, an increase of 3.23 billion yuan over the previous year. It is worth noting that the gross margin of overseas market products reached 10.19%, 4.59 pct higher than the gross margin of domestic market products, and a significant increase of 6.49 pct compared to the previous year.
According to the company's financial report and performance report, Baosteel's steel export sales volume in 2023 was 5.837 million tons, an increase of 46% over the previous year, reaching a record high. Automobile plate exports reached a record high throughout the year. The number of silicon steel exports continued to grow, the proportion of high-value-added products increased significantly, and exports of pickled automobile grade steel increased 62% year on year. Baosteel Co., Ltd. is expected to continue to increase export market development this year, setting a steel export target of 6 million tons to 6.7 million tons.
CITIC Special Steel's foreign market sales also reached 15.852 billion yuan, an increase of 5.336 billion yuan over the previous year, an increase of 50.74%, and the gross margin in the overseas market reached 21.96%, 10.85 pct higher than the average gross margin of 11.71% in the domestic market, and 4.31 pct higher than the gross margin of 17.65% in the previous year.
In addition to the two leading companies mentioned above, after completing the relocation of the new factory in Fangchenggang, Liugang Co., Ltd. (601003.SH) also saw a significant increase in its export business. In 2023, the company's export value reached 631 million yuan, while the company's export value in the previous year was only 173 million yuan, an increase of 264.74%. The product gross margin was 8.66%, far higher than the gross profit margin of domestic products.
In 2023, overseas markets clearly supported China's steel industry demand. The country's steel exports jumped to 90.26 million tons, a sharp increase of 23.99 million tons compared with the previous year, achieving a growth rate of 36.2%. The positive growth trend in overseas markets has prompted domestic steel manufacturers to increase their attention and participation in overseas markets.
According to data from the Steel Industry Association, in the first quarter of this year, China exported a total of 25.08 million tons of finished steel, an increase of 30.7% over the previous year. At the same time, the steel export structure continued to be optimized. China's exports of high-value-added products accounted for more than 35%, and exports of high-end products increased strongly the international competitiveness and influence of China's steel industry. In terms of variety, in the first quarter of this year, cold-rolled thin and wide steel strips, coated sheets (strips), and hot-rolled sheets were the varieties that increased the most, with year-on-year increases of 16.5%, 14.5%, and 63.8%, respectively.