China Galaxy Securities: Steel net exports increased in August, prices and demand expected to rise.

China Galaxy Securities released a research report stating that in August, the domestic steel market reduced its inventory, with a total social inventory of 9.36 million tons, a decrease of 10.00% compared to the previous period and a 2.70% decrease year-on-year. Steel net exports increased compared to the previous month, with a net export volume of 8.99 million tons in August, an increase of 1.66 million tons compared to the previous month. With the traditional peak season for steel consumption "Golden September, Silver October" approaching since September, the industry's supply and demand situation is expected to further improve, catalyzing a rebound in steel prices. Core assets in manufacturing with operational resilience and competitive advantages are expected to see profit recovery and value reassessment. The Ministry of Industry and Information Technology has temporarily halted the replacement of steel production capacity, and positive policy changes are expected to drive market expectations for improvement. Long-term constraints on the supply side are expected to become apparent, and steel profits may gradually stabilize and rise. Main points from China Galaxy Securities: Secondary market trends During this month (September 1, 2024 - September 15, 2024), the Shanghai Composite Index fell by 4.86%, the Shenzhen Component Index fell by 4.37%, and the Growth Enterprise Market Index fell by 2.87%. Among the primary industry indices, the steel sector fell by 5.17%. According to the three-tier sub-industries in the steel sector weighted by total market value, the long steel sub-sector performed well, rising by 2.72%. Among the individual stocks in the steel sector, the proportions of stocks that rose, maintained, and fell were 18.18%, 2.27%, and 79.55%, respectively. Steel quantity and price data overview According to the latest data from the National Bureau of Statistics, as of August 2024, the overall economic operation of the steel industry remained stable with a slight decline in quantity and price. Steel prices have shown some downward trend, with China's comprehensive steel index at 93.71, a decrease of 7.62 from the previous month, representing a 7.52% decrease. Production output decreased year-on-year, with domestic crude steel, pig iron, and steel production in August totaling 77.92 million tons, 68.14 million tons, and 110.90 million tons, respectively, representing a decrease of 10.40%, 8.80%, and 6.50% year-on-year. In August, the domestic steel market reduced its inventory, with a total social inventory of 9.36 million tons, a 10.00% decrease compared to the previous period and a 2.70% decrease year-on-year. Steel net exports increased compared to the previous period, with a net export volume of 8.99 million tons in August, an increase of 1.66 million tons compared to the previous month. Analysis of steel supply and demand industry chain From the supply side, since August, domestic steel companies have faced challenges with a decline in industry profitability. Steel companies have begun to implement production adjustments, with some steel mills undergoing maintenance and blast furnace production decreases, resulting in a decrease in operating rates. Among the 247 sample steel companies nationwide, the average blast furnace operating rate in August 2024 was 78.82%, a decrease of 3.74 percentage points compared to the previous period, and a 4.84 percentage point decrease year-on-year. From the demand side, the apparent consumption of steel in China in August was 101.91 million tons, a 6.40% decrease year-on-year. Looking at different types of steel products, the apparent consumption of rebar, cold-rolled sheets, hot-rolled sheets, wire rods, and medium plates in China in July was 15.43 million tons (a 14.47% decrease compared to the previous period), 3.29 million tons (a 4.72% increase), 13.11 million tons (an 8.63% increase), 11.05 million tons (a 6.81% decrease), and 6.92 million tons (a 3.16% increase), respectively. From the upstream perspective, as raw material prices rise, steel company profitability has declined. From the downstream demand perspective, China's industrial added value for enterprises above a certain scale increased by 4.50% year-on-year in July, a decrease of 0.60 percentage points from the previous month. By sector, infrastructure construction investment (excluding power) accumulated a year-on-year growth of +4.40%, real estate investment accumulated a year-on-year decline of 9.80%, manufacturing investment accumulated a year-on-year growth of +9.10%, and strong manufacturing demand is expected to continue. In general, the manufacturing industry's recovery trend continues, and the effects of real estate policies are expected to gradually show. Currently, downstream demand is somewhat differentiated, with low purchasing activity focusing on essential needs. China's mid-to-high-end special steel is in a growth stage, with applications in aerospace, new energy, shipbuilding, and other high-end manufacturing industries in a period of vigorous development, expected to benefit from the recovery of the manufacturing industry. Investment recommendations Currently, as steel demand shifts from real estate to high-end manufacturing, domestic manufacturing is expected to continuously upgrade, steel mills are expected to continue production, and there is rigid support for steel demand from the manufacturing industry. In the second half of the year, real estate demand may still drag on steel demand, but infrastructure demand is expected to be concentrated, export demand has resilience, and overall demand is expected to be better than the first half of the year. China Galaxy Securities believes that with the traditional peak season for steel consumption "Golden September, Silver October" approaching since September, the industry's supply and demand situation is expected to further improve, catalyzing a rebound in steel prices. Core assets in manufacturing with operational resilience and competitive advantages are expected to see profit recovery and value reassessment. The Ministry of Industry and Information Technology has temporarily halted the replacement of steel production capacity, and positive policy changes are expected to drive market expectations for improvement. Long-term constraints on the supply side are expected to become apparent, and steel profits may gradually stabilize and rise. Steel core assets with strong profitability and stable high dividends are expected to see valuation recovery. It is recommended to focus on leading companies in the general steel and special steel sectors, among others. Risk warning: Risks such as lower-than-expected downstream real estate and infrastructure demand; uncertainties in raw material prices such as iron ore and coal; risks of major changes in the steel industry policies, etc.