Guotai Haitong: Steel profit margins continue to rise, optimistic about sector layout opportunities.

Guotai Haitong released a research report stating that demand is expected to gradually bottom out, and even without considering supply policies, the current steel industry has been in a loss for a long time. Market-driven clearance of supply has begun to appear, and it is expected that the steel industry is gradually emerging from the bottom. If supply policies are implemented, the speed of supply contraction in the industry will be faster, and the industry's upward progress will unfold more quickly. Guotai Haitong's main points are as follows: Demand declined month-on-month, and total inventory turned into cumulative inventory. Last week (referring to the week of 28 July to 1 August 2025) the apparent consumption of five major steel products was 852.03 million tons, a decrease of 161,000 tons compared to the previous week. Among them, apparent consumption of construction materials was 279.3 million tons, a decrease of 214,800 tons, and apparent consumption of plates was 572.73 million tons, an increase of 53,800 tons compared to the previous week. Last week, the production of five major steel products was 867.42 million tons, an increase of 4,500 tons compared to the previous week; total inventory was 1,351.89 million tons, an increase of 153,900 tons, maintaining the lowest level in the same period in recent years. Last week, the blast furnace operating rate of 247 steel plants was 83.46%, unchanged from the previous week; blast furnace capacity utilization rate was 90.81%, a decrease of 0.08 percentage points from the previous week; electric furnace operating rate was 62.82%, an increase of 0.64 percentage points from the previous week; electric furnace capacity utilization rate was 54.09%, an increase of 0.61 percentage points. In the short term off-season, demand may maintain a marginally weakening trend, and total inventory may enter a cumulative inventory channel. Profitability increased month-on-month. Last week, imported iron ore inventory at 45 ports was 136.579 million tons, a decrease of 1.3248 million tons compared to the previous week. The simulated average gross profit per ton of rebar last week was 351.8 yuan/ton, an increase of 21.7 yuan/ton compared to the previous week, and the simulated average gross profit per ton of hot-rolled coil was 237.8 yuan/ton, a decrease of 6.3 yuan/ton; the profitability rate of 247 steel companies was 65.37%, an increase of 1.73% compared to the previous week. Looking ahead, it is expected that iron ore production will accelerate and demand will not have a significant increase. Iron ore may gradually enter a loose cycle, the factors constraining steel costs are expected to improve, and the industry's profitability center is expected to gradually recover. Demand is expected to stabilize, while supply is expected to continue to shrink. The continuous decline in the real estate sector has led to a decrease in the proportion of demand from the real estate sector. The negative drag effect of real estate on demand is expected to weaken; demand from the infrastructure and manufacturing sectors is expected to grow steadily. In terms of exports, at the beginning of 2025, the market underestimated that exports would decrease significantly, but due to the widening price difference between domestic and foreign markets, steel exports from January to June maintained a year-on-year growth. Overall, it is expected that steel demand will gradually stabilize. Looking at the supply side, the industry has been in a loss since the third quarter of 2022, with over 30% of steel companies still incurring losses. Market-driven clearance of supply has begun to appear, and the industry is gradually emerging from the bottom. On 18 July, Xie Shaofeng, Chief Engineer of the Ministry of Industry and Information Technology, stated at a press conference of the State Council Information Office that the "Steady Growth Plan for the Ten Key Industries including Steel, Nonferrous Metals, Petrochemicals, and Building Materials" will soon be released. The Ministry of Industry and Information Technology will promote the adjustment of structure, optimization of supply, and elimination of outdated production capacity in key industries. It is expected that if supply policies are implemented, the speed of supply contraction in the industry will be faster, and the industry's upward progress will unfold more quickly. Maintain a "buy" rating. In the long run, the increase in industrial concentration and the promotion of high-quality development are the inevitable trends in the future development of the steel industry. Steel companies with product structure and cost advantages will fully benefit from this; under the background of stricter environmental protection measures, ultra-low emission transformations, and carbon neutrality, the competitive advantage and profitability of leading companies will become more prominent. Risk warning: Supply contraction is less than expected, and demand decreases significantly.