Guotai Junan: Steel demand continues to rise, total inventory starts to decline trend.

Guotai Junan released a research report stating that last week, the apparent consumption of five major types of steel was 8.5311 million tons, an increase of 258,300 tons compared to the previous week; production was 8.3428 million tons, a decrease of 79,800 tons compared to the previous week; total inventory was 18.6029 million tons, a decrease of 188,300 tons compared to the previous week, maintaining the lowest level since 2017. As the off-season gradually transitions to the peak season, steel demand is expected to continue to rise, while total inventory is expected to continue to decline. Looking ahead, with the gradual transmission of real estate policies, the real estate industry is expected to stabilize, and considering the decreasing proportion of steel demand from the real estate sector, the negative drag effect of real estate on steel demand is expected to significantly weaken; under the stimulus of fiscal policy, infrastructure construction will continue to play a stabilizing role, and manufacturing demand will experience steady growth. Guotai Junan's main points are as follows: Demand continues to rise, with a downward trend in inventory Last week, the apparent consumption of five major types of steel was 8.5311 million tons, an increase of 258,300 tons compared to the previous week; production was 8.3428 million tons, a decrease of 79,800 tons compared to the previous week; total inventory was 18.6029 million tons, a decrease of 188,300 tons compared to the previous week, maintaining the lowest level since the same period in 2017. The blast furnace operation rate of 247 steel plants was 79.51%, an increase of 1.22 percentage points compared to the previous week; the blast furnace capacity utilization rate was 86.54%, an increase of 0.96 percentage points compared to the previous week; the electric arc furnace operation rate was 60.9%, an increase of 1.28 percentage points compared to the previous week; the electric arc furnace capacity utilization rate was 47.83%, an increase of 2.06 percentage points compared to the previous week. As the off-season gradually transitions to the peak season, steel demand is expected to continue to rise, while total inventory is expected to maintain a downward trend. Profitability increases compared to the previous week Last week, the inventory of 45 Hong Kong-imported iron ore was 145.78 million tons, a decrease of 6.44 million tons compared to the previous week, maintaining a high level. The simulated gross profit per ton of rebar last week was 307.8 yuan/ton, an increase of 53.6 yuan/ton compared to the previous week, and the simulated gross profit per ton of hot-rolled coil was 227.8 yuan/ton, an increase of 3.6 yuan/ton compared to the previous week; the profitability ratio of 247 steel companies was 53.25%, an increase of 3.03 percentage points compared to the previous week. Last week, steel prices and raw material prices fell simultaneously, but the decrease in raw material prices was greater than the decrease in steel prices, resulting in an increase in steel company profits compared to the previous week. Looking ahead, it is expected that the acceleration of iron ore production and a limited increase in demand may put iron ore in a loose cycle, the constraints on steel production costs are expected to improve, and the industry's profit center is expected to gradually recover. Demand is expected to gradually stabilize, and supply is expected to contract Looking ahead, with the gradual transmission of real estate policies, the real estate market is expected to stabilize, and considering the decreasing proportion of steel demand from the real estate sector, the negative drag effect of real estate on steel demand is expected to significantly weaken; under the stimulus of fiscal policy, infrastructure construction will continue to play a stabilizing role, and manufacturing demand will experience steady growth. Overall, it is expected that steel demand will gradually stabilize. In terms of supply, the industry has been in a deficit for over two years, with the tail-end steel companies experiencing cash flow losses. In 2024, two waves of active production cuts are expected, highlighting the industry's vulnerability, with the possibility of further production cuts or even shutdowns in 2025. In terms of policies, ultra-low emissions reform, environmental protection, carbon neutrality policies, etc., will reshape the industry competition landscape, and companies with environmental protection and low-carbon advantages are favored. As the industry accelerates mergers and acquisitions, an increase in concentration will bring long-term profit recovery. Maintain an "overweight" rating for the industry In the long term, increasing industrial concentration and promoting high-quality development are the inevitable trends for the future development of the steel industry, and steel companies with product structure and cost advantages will greatly benefit; under the background of stricter environmental regulations, ultra-low emissions reform, and carbon neutrality, the competitive advantages and profitability of leading companies will become more prominent. Key recommendations: 1) Baoshan Iron & Steel (600019.SH) with leading technology and product structure, Hunan Valin Steel (000932.SZ) and Beijing Shougang (000959.SZ) with continuous product structure upgrades, low-cost and flexible steel companies Fangda Special Steel Technology (600507.SH) and Xinyu Iron & Steel (600782.SH). 2) Citic Pacific Special Steel Group (000708.SZ) and Yongjin Technology Group (603995.SH) with low valuation, high dividends, and competitive advantages; Zhejiang JIULI Hi-tech Metals (002318.SZ), Suzhou Xianglou New Material (301160.SZ), POCO Holding (300811.SZ) with high barriers, materials companies, high-temperature alloy leaders Jiangsu Toland Alloy (300855.SZ), Fushun Special Steel (600399.SH), Shanghai Zhongzhou Special Alloy Materials (300963.SZ). 3) In the trend of demand recovery, optimistic about upstream resource companies with long-term advantages, recommended Hbis Resources (000923.SZ), Dazhong Mining (001203.SZ), Sichuan Anning Iron And Titanium (002978.SZ), Inner Mongolia ERDOS Resources (600295.SH), Yongxing Special Materials Technology (002756.SZ), Inner Mongolia Baotou Steel Union(600010.SH), etc. Risk warning Supply contraction is not as expected, and demand decreases significantly.