CITIC SEC: A Substantive Step Towards Anti-"Involution", Steel Production Restrictions Expected to be Implemented.

CITIC SEC released a research report stating that China's steel industry has strong global competitiveness but weak profitability, and is expected to become a key industry targeted by the current round of "anti-insulation" measures. Recently, the Ministry of Industry and Information Technology issued a work plan for stabilizing the growth of the steel industry, once again emphasizing the "continued implementation of production reduction policies." CITIC SEC predicts that in September, the steel industry's production restrictions may accelerate and intensify, and as the restrictions are implemented, the industry will enter a performance cycle with profitability as the core. The main points of CITIC SEC are as follows: Industries with strong global competitiveness but weak profitability are the key focus of the current "anti-insulation" measures. Since July, efforts to rectify the "insulated" competition have continued, and on August 29, at a press conference of the National Development and Reform Commission, the spokesperson Li Chao once again emphasized the need to "accelerate the rectification of issues such as insulated, disorderly competition, and market disorder in certain areas." In the short term, we believe the focus of "anti-insulation" will remain on industries with strong global competitiveness but weak profitability, aiming to promote competitiveness enhancement, profit increase, R&D investment, and competitiveness improvement in these industries, thereby injecting intrinsic momentum into the construction of a modern industrial system and the development of new productive forces. The Ministry of Industry and Information Technology's work plan for stabilizing the growth of the steel industry could be a breakthrough in the current round of "anti-insulation." We estimate that China's steel industry accounts for over half of global production, but the average profit margin of listed steel companies in 2024 is only -0.26%, making it a key industry targeted by the current round of "anti-insulation." On July 18, Xie Shaofeng, chief engineer of the Ministry of Industry and Information Technology, stated at a press conference that the work plan for stabilizing the growth of ten key industries, including steel, nonferrous metals, and petrochemicals, will soon be introduced. According to a report from the Steel Home website, the "Steel Industry Stabilization Work Plan (2025-2026)" has been recently issued, focusing on the core contradiction of "large industry supply, insufficient effective demand," and introducing requirements to "strictly prohibit new production capacity and implement production reduction and control total volume." We believe the introduction of the plan will serve as a breakthrough in the steel industry, leading to the establishment of typical rectification measures and the acceleration of governance achievements. Production restrictions may still be an important measure for the "anti-insulation" of the steel industry, with the potential to improve industry profits and prices. The plan states, "Continue to implement the production reduction policy, implement the annual production control tasks in accordance with the principles of supporting the development of advanced enterprises and forcing the exit of backward and inefficient capacity, and promote a dynamic balance between supply and demand." According to data from the National Bureau of Statistics, China's crude steel production in the first seven months of this year decreased by about 20 million tons year-on-year. Considering the current peak production season, we expect production restrictions to accelerate and intensify in September. Based on data from the National Bureau of Statistics, we assume that to achieve the target of 50 million tons of production reduction for the whole year, crude steel production will need to maintain a monthly year-on-year decline rate of 8.5% starting from August this year. Looking back at the experiences of 2015-2016 and 2021, production restrictions have improved industry profitability and price levels. In October 2021, the year-on-year growth rate of the steel industry's producer price index (PPI) reached a high of 39.9%, with total industry profits increasing by 75.5% for the year. Under the "decrease in quantity" characteristic of steel, phased withdrawal policies are necessary measures. Since 2021, with the softening of the real estate market, steel demand has faced significant pressure from sustained demand declines. When demand no longer grows, internal structural issues tend to accumulate. From 2022 to 2024, the steel industry in China has not effectively reduced capacity and production, leading to a sustained imbalance between supply and demand. 2025, as an important year for "anti-insulation" and the closing year of the "14th Five-Year Plan", is expected to address the accumulated supply and demand imbalances in the steel industry. We anticipate that phased policies for clearing steel industry capacity and production volumes will become a regular policy tool. Steel stocks are poised to enter the second phase centered on profitability. Looking back over the past 10 years, steel stocks have tended to experience a new cycle of profitability, often accompanied by an upturn in assets. This generally includes three stages: 1) the recovery period of super-low valuation; 2) the performance cycle centered on profitability; 3) the peak stage after full profit release. After the uptrend this year, steel stocks have already shown significant valuation repair. We expect that as production restrictions deepen, the industry will soon enter a performance cycle centered on profitability.