Guosheng Securities: Profits of the steel industry increased significantly in the first half of the year, looking forward to the effective implementation of the "anti-overwork" policy.

Guosheng Securities released a research report stating that in the first half of this year, the profits of the black metal smelting and rolling processing industry have shown a promising turnaround, reaching 46.28 billion yuan, a year-on-year increase of 13.7 times, with the highest growth rate among all 31 major industrial categories. The demand for black metal is not pessimistic, and if the "anti-internal circulation" policy is effectively implemented in the second half of the year, it will accelerate the industry's return to profitability. It is hoped that the anti-internal circulation policy of steel mills this time can be quickly transformed into actual production reduction actions. As for the targets, steel stocks are still considered to be undervalued. Previously, based on the reset value calculation, some companies in the industry were in the undervalued zone, with a very strong safety margin, and the industry has opportunities for future recovery. The main points of Guosheng Securities are as follows: This week, the market rose before adjusting, and stocks of industries related to "anti-internal circulation" rallied and then fell. Price fluctuations in the commodity market, especially in black materials represented by coking coal, have increased. The rebound in the commodity market in June began due to a deviation in inventory cycle expectations caused by strong economic expectations for the first half of the year and then received the boost of the "anti-internal circulation" policy in July. Price increases in the commodity market will "create" demand themselves, and the expansion of speculative demand will amplify price fluctuations, ultimately making prices the most important "fundamentals" in the market, followed by a period of adjustment. Historically, extreme fluctuations in black commodities have been more driven by industrial speculation, and market trends usually progress in a sine curve upward spiral. For assets with a long-term period like stocks, it is necessary to look beyond short-term price fluctuations and follow the medium-term production capacity cycle as a clue. It has been repeatedly explained that the long-term low returns on capital in the smelting industry over the past few years are important conditions for supply adjustments. In the first half of this year, the profits of the black metal smelting and rolling processing industry have shown a promising turnaround, reaching 46.28 billion yuan, an increase of 13.7 times year-on-year, with the highest growth rate among all 31 major industrial categories. The cyclical issue can certainly be resolved over time no cycle is forever downward. This is the power of the market economy, which can adjust supply and demand through prices. In the second half of the year, as the gradual disappearance of export quotas and the slowdown in fiscal stimulus, as well as the higher base caused by the fiscal stimulus since August last year, the economic growth rate in the second half of the year may decrease compared to the first half. Measures to ease the situation include the implementation of existing policies, such as fiscal policy tools and real estate purchase restrictions in the first half of the year, as well as some reserved policies. The overall economy is expected to remain stable and controllable. The demand for black metals is not pessimistic, and if the "anti-internal circulation" policy is effectively implemented in the second half of the year, it will accelerate the industry's return to profitability. It is hoped that the anti-internal circulation policy of steel mills this time can be quickly transformed into actions to reduce production. Steel stocks are still considered to be undervalued. On the evening of July 3, Hunan Valin Steel announced that shareholder Xintai Life Insurance has accumulated Hunan Valin Steel shares through the secondary market's centralized bidding method from January 2025 to now, holding a total of 345 million shares, accounting for 5.00% of the total share capital. The decision of insurance companies to increase their stake in high-quality steel companies also confirms the investment value of steel stocks. Based on the reset value calculation, some companies in the industry were in the undervalued zone, with a very strong safety margin, and the industry has opportunities for future recovery. Molten iron production has decreased, and inventory has shifted from a decrease to an increase. This week, the national blast furnace capacity utilization rate slightly decreased, while the electric furnace capacity utilization rate rebounded. The blast furnace capacity utilization rate of 247 domestic steel mills was 90.2%, a decrease of 0.6% compared to the previous period and an increase of 0.6% year-on-year. The electric furnace capacity utilization rate of 91 domestic steel mills was 54.1%, an increase of 0.6% compared to the previous period and an increase of 4.3% year-on-year. The weekly production of the five major varieties of steel was 8.674 million tons, an increase of 0.1% compared to the previous period and a decrease of 0.9% year-on-year. This week, the production of long-process products continued to decline, with the average daily molten iron production decreasing by 15,000 tons to 2.407 million tons, a decrease in rebar production, and an increase in hot rolled coil production. As for inventory, this week the social inventory of the five major varieties of steel was 94.24 million tons, an increase of 1.6% compared to the previous period and a decrease of 25.8% year-on-year. The inventory of steel mills was 40.95 million tons, a slight increase compared to the previous period and a decrease of 16.0% year-on-year. The total inventory of steel materials has shifted from a decrease to an increase, with an increase of 1.2%. Social inventory has accumulated significantly, while the inventory of steel mills has increased slightly. This week, the total apparent consumption of the five major varieties of steel, based on production and total inventory data, was 85.2 million tons, a decrease of 1.9% compared to the previous period and a decrease of 2.6% year-on-year. Of this, the apparent consumption of rebar was 20.34 million tons, a decrease of 6.1% compared to the previous period and a decrease of 10.4% year-on-year. This week, the apparent demand for the five major varieties of steel continued to weaken, with weakening demand for rebar in the off-season. The average weekly turnover of construction steel was 94,000 tons, an increase of -18.0% compared to the previous period. This week, the spot prices of steel materials fell, with a slight decrease in the gross profit margin of mainstream steel varieties. The profit margin of 247 steel mills was 65.4%, an increase of 1.7% compared to the previous week. Industry profits surge in the first half, followed by accelerated progress in anti-internal circulation Data released by the National Bureau of Statistics shows that in the first half of this year, the profits of the black metal smelting and rolling processing industry were 46.28 billion yuan, an increase of 13.7 times year-on-year, with the highest growth rate among all 31 major industrial categories. The Chief Engineer of the Ministry of Industry and Information Technology stated at a press conference on July 18 that the work plan for stabilizing growth in ten key industries such as steel, nonferrous metals, petrochemicals, and building materials will soon be issued. The Ministry of Industry and Information Technology will promote the adjustment of industrial structure, supply improvement, and the elimination of backward production capacity in key industries. With the subsequent control and transformation of the industry's supply side, combined with improving demand trends, the medium to long-term fundamentals of the steel industry are expected to continue to improve. Steel pipe companies continue to benefit from the increase in coal-fired power capacity and expectations of prosperity in the oil and gas industry. According to Wind data, the total investment in domestic coal-fired power in January-May 2025 was 56.7 billion yuan, an increase of 54.0% year-on-year, and the total investment in nuclear power was 45.3 billion yuan, an increase of 33.4% year-on-year. In the current background of ensuring energy independence and accelerating the planning and construction of a new energy system, targets related to coal-fired and nuclear power plant construction are expected to benefit significantly. In addition, targets related to oil and gas exploration and pipeline construction are expected to benefit from the oil and gas industry boom cycle. Targets Recommendations for stocks in the undervalued area include Hunan Valin Steel (000932.SZ), Nanjing Iron & Steel (600282.SH), Baoshan Iron & Steel (600019.SH), Xinyu Iron & Steel (600782.SH), Zhejiang JIULI Hi-tech Metals (002318.SZ) benefiting from the oil and gas and nuclear power cycles, Xinxing Ductile Iron Pipes (000778.SZ) benefiting from pipeline upgrades and steel profitability elasticity, Jiangsu Changbao Steeltube (002478.SZ) benefiting from coal-fired power plant construction and the oil and gas cycle, as well as Yongjin Technology Group (603995.SH) benefiting from demand recovery and nickel-plated steel shell business. It is recommended to pay attention to Jiang Su Wujin Stainless Steel Pipe Group (603878.SH), benefiting from coal-fired power plant construction and the trend of import substitution. Risk warning Domestic production control policies that exceed expectations, lower-than-expected downstream demand, and unexpected price increases in raw materials.