Zhongjin: The strong erosion of profits in 25Q3 furnace materials, focus on the valuation repair of core steel assets.

Zhongjin Research Report: The steel industry entered the off-season in the third quarter of 2025, with weak demand and a 0.9% year-on-year decrease in the apparent consumption of the five major steel products to 15559.86 million tons. At the beginning of the quarter, as the industry's expected capacity and output reduction strengthened, steel companies' profits improved and production momentum increased. However, due to the slower-than-expected implementation of production restrictions, iron prices remained high, leading to an increase in prices of coking coal, coke, and iron ore, which eroded profits. High-quality core assets are still trading below book value at the current moment, and as the overall market continues to rise, the steel sector remains relatively cheap. Trends are more important than fluctuations, and the anti-"involution" trend is expected to continue. Zhongjin's main points: Predictions show that the profits of key steel companies in the third quarter of 2025 are expected to slightly decrease month-on-month, with a significant improvement year-on-year as production cuts are slow and raw materials erode profits strongly. Sector logic: 1) With the gradual implementation of anti-"involution" policies and strengthened expectations for steel capacity reduction, industry supply and demand are expected to improve, and the industry's medium-term prosperity is expected to continue to recover. 2) With the release of low-cost iron ore production capacity and continued ample supply of coke, the downward cycle of raw material prices is likely to continue, with profits in the black industry gradually shifting towards finished products. Preview of 19 key A-share companies in the third quarter of 2025, with a total market value of 651.75 billion yuan, accounting for 67.2% of the total market value of the Shanghai Steel sector. 1) General steel: The significant recovery in the prices of major steel products still does not offset the profit erosion caused by rising costs due to raw material disruptions. Zhongjin estimates that the gross profit of long products and flat products decreased by -33 and -29 yuan/ton respectively, month-on-month, while year-on-year increases were +159 and +454 yuan/ton respectively. Companies with a higher proportion of long products and flat products are expected to see larger declines in profits and more significant improvements year-on-year. It is estimated that Hunan Valin Steel will achieve a net profit of 740 million yuan attributable to shareholders in the third quarter of 2025, a decrease of 38% month-on-month and an increase of 68% year-on-year. 2) Special steel: With the continuous growth in demand for high value-added products and the manufacturing industry, companies have strong pricing power, resulting in stable profits. Trends are more important than fluctuations, and we look favorably on the sustained evolution of the anti-"involution" steel industry Zhongjin points out that high-quality core assets are still trading below book value at the current moment, and with the overall market gradually rising, the steel sector remains relatively cheap. Zhongjin believes that trends are more important than fluctuations, and the anti-"involution" trend is expected to continue to evolve. Investment focus is on two main strategies: 1) Long-term perspective: Industry core asset valuations are undervalued, and with profits bottoming out and supply being cleared, valuation recovery is expected, with a focus on Hunan Valin Steel (000932.SZ); 2) Short-term perspective: The impact of production cuts and capacity reduction on rebar companies is greater this year, so it is suggested to focus on steel companies with high efficiency and a high proportion of long products. Risk factors Recovery in downstream demand is slower than expected; significant fluctuations in raw material prices; slower-than-expected implementation of production restrictions; global macroeconomic volatility affecting export demand.