China Great Wall: Q4 strong expected trading is expected to continue, iron and steel sector has ample room for recovery.

China Great Wall released a research report stating that in the early stage of the rebound in steel prices in this round of positioning, the bottom conditions of the fundamentals are no longer established. After entering the seasonal off-peak period, some blast furnaces need annual maintenance, which may suppress the rebound in molten iron production. As for inventory, as a reflection of supply and demand lag, current inventory levels are generally low and continue to reduce. Before molten iron production substantially resumes, inventory may not exert significant pressure on the fundamentals. Strong expectations have been proven wrong, and as we enter the off-peak season in November, the weight of expected transactions is amplified. With the possibility of policy adjustments and a window of time where expectations are difficult to verify, the time and space for the rebound in the steel sector may be extended. Key points from China Great Wall: Overview: Weak end-market demand + strong pressures from metallurgical coke leading to losses for most enterprises In the third quarter of 2024, the weakening trends in the real estate and manufacturing sectors, along with disturbances from the switch between new and old standards for rebar steel, caused prices of black commodities to decline collectively. With steel production capacity exceeding demand, and metallurgical coke remaining relatively strong, the profit margins for steel companies have fallen to the lowest levels in recent years. Companies dealing with steel pipes for oil and gas production and shipbuilding materials have performed relatively well, with special steel showing stronger resilience than general steel, and the iron ore sector demonstrating relatively better performance. According to data from listed steel companies: End-market demand weakens, with revenue in the first three quarters of 2024 down 9.5% year-on-year, and a 13.4% year-on-year decrease in the third quarter of 2024, as well as a 9.5% sequential decrease. With weakening end-market demand and heightened contradictions from excess production capacity, rebar and hot-rolled steel prices fell by 8.3% and 12.0%, respectively. The sharp decline in steel prices led to increased losses in the industry and reduced production, with crude steel production down 13.2% in the third quarter. Prices and production volumes have both declined, putting significant pressure on the revenue side of steel companies with double-digit declines. Increasing cost pressures, with costs down 7.8% year-on-year for the first three quarters of 2024, a 9.3% year-on-year decrease in the third quarter of 2024, and a 6.8% sequential decrease: As the oversupply of mining and coking materials was less severe, prices for these materials in the third quarter were stronger than finished products, especially with stringent domestic safety policies for metallurgical coke. Compared to the previous quarter, iron ore and metallurgical coke prices declined by 10.8% and 6.2%, respectively. Strong performance in raw materials, combined with rigid costs for energy, labor, and depreciation, further exacerbated the deterioration of profit margins as steel prices fell. Substantial profit declines: Due to the narrowing purchase-sales price difference for steel companies, gross profits in the first three quarters of 2024 fell by 36% year-on-year, with rising sales and finance expenses and limited declines in management and development expenses, resulting in a non-GAAP net loss of 165% year-on-year for the sector in the first three quarters of 2024. In the third quarter of 2024, this non-GAAP net loss was 209% year-on-year and 690% sequentially, with the industry as a whole falling into losses. The annualized return on equity for the industry in the first three quarters of 2024 dropped to -1.10%, with a decrease of 108 yuan per ton to 141 yuan per ton in gross profit per ton and a decrease of 101 yuan per ton to -89 yuan per ton in net profit per ton compared to 2023. Strategy: Strong expectations for trading in the fourth quarter are expected to continue, with extensive room for sector recovery In the early stages of the rebound in steel prices in this round, the low production, low profitability, and low inventory situation in the fundamentals have solidified the bottom conditions. Strong policy initiatives and significant expectations of a turnaround constitute strong drivers for stopping the drop and rebounding. Looking ahead, the end of the drive may require the satisfaction of the following conditions: Bottom conditions of the fundamentals are no longer established. After entering the seasonal off-peak period, some blast furnaces need annual maintenance, which may suppress the rebound in molten iron production. As for inventory, as a reflection of supply and demand lag, current inventory levels are generally low and continue to reduce. Before molten iron production substantially resumes, inventory may not exert significant pressure on the fundamentals. Strong expectations have been proven wrong, and as we enter the off-peak season in November, the weight of expected transactions is amplified. With the possibility of policy adjustments and a window of time where expectations are difficult to verify, the time and space for the rebound in the steel sector may be extended. Therefore, the sustainability of this round of expected drivers may last at least until the peak season of 2025. However, respecting historical patterns, monitoring molten iron production remains essential. A significant increase in molten iron production or a phase of adjustment may occur. Investment: Low-level recovery in mineral and sheet materials, alongside high-quality new material leaders in the steel industry As demand shifts from real estate to manufacturing, following the transformation and upgrading of the domestic manufacturing industry, leading companies in high-quality sheet materials/special steel, such as Hunan Valin Steel (000932.SZ), Nanjing Iron & Steel (600282.SH), Changcheng Special Steel (000708.SZ), and Baoshan Iron & Steel (600019.SH), should have greater certainty. Additionally, processing targets with stable competition and continuous high-end upgrades are worth noting, such as Zhejiang JIULI Hi-tech Metals (002318.SZ), Jiang Su Wujin Stainless Steel Pipe Group (603878.SH), and Yongjin Technology Group (603995.SH). With positive macroeconomic expectations and loose liquidity support, resource commodities like iron ore and molybdenum with tight supply-demand conditions exhibit attractive elasticity, where companies like Hbis Resources (000923.SZ) and Jinduicheng Molybdenum (601958.SH) offer high dividends. The resurgence of grain-oriented silicon steel is gradually becoming clearer, benefiting companies like Chongqing Wangbian Electric (Group) Corp., (603191.SH). New materials: In an era where competition and barriers are increasingly important, long-term excellent sector leaders deserve more attention In the explosive transformation from 0 to 1, companies accelerating capital expenditures in leading areas, such as 3C hinge NBTM New Materials Group (600114.SH) and titanium material TIANGONG INT'L (00826), should be prioritized. High-performance copper alloys, such as Shaanxi Sirui Adva, are also worth considering.Advanced Materials (688102.SH), Ningbo Boway Alloy Material (601137.SH); AI chip inductor POCO Holding (300811.SZ); Automotive new materials Lizhong Sitong Light Alloys Group (300428.SZ), Friend Co.,Ltd. (605050.SH), Baowu Magnesium Technology (002182.SZ), Ningbo Sinyuan Zm Technology (301398.SZ), Zhejiang Wanfeng Auto Wheel (002085.SZ).In the growth sector, select leading companies with high capital expenditure, such as Fushun Special Steel (600399.SH), Gaona Aero Material (300034.SZ), Jiangsu Toland Alloy (300855.SZ), and Anhui Yingliu Electromechanical (603308.SH); titanium alloy companies Western Metal Materials (002149.SZ) and Western Superconducting Technologies (688122.SH). In the stable sector, focus on leading companies with optimized layout and slowing capital expenditure growth, such as aluminum thermal materials company Shanghai Huafon Aluminium Corporation (601702.SH) and Jiangsu Asia-Pacific Light Alloy Technology (002540.SZ); precision stamping steel company Suzhou Xianglou New Material (301160.SZ); aluminum sheet and foil leading company Henan Mingtai Al.Industrial (601677.SH). Risk warning Risks include unexpected demand recovery; risks of industry supply levels growing too quickly.