Guotai Haitong: Maintain a "buy" rating for the steel industry, with expectations of continued supply contraction.

Guotai Haitong released a research report stating that it maintains a "buy" rating on the steel industry. After experiencing a turning point in 2025, 2026 should be a year of consolidating gains and nurturing development. With the industry continuing to stabilize along with demand and supply reductions, maintaining good profits will be key. At the same time, the stable profits and dividend repurchase enhancements of leading companies are expected to open up valuation space. With stricter environmental protection regulations, ultra-low emission transformations, and the background of carbon neutrality, the competitive advantage and profitability of leading companies in the industry will be further highlighted. Guotai Haitong's main points are as follows: Demand is expected to stabilize and recover Since 2021, the overall steel consumption in the real estate industry has continued to decline, with the proportion of steel demand from the industry falling. On the other hand, with the increase in fixed asset investment in the manufacturing industry, the demand for steel from this sector is steadily increasing, causing significant changes in the demand structure of the steel industry. Looking ahead to 2026, along with continued macro policies and the gradual transmission of support policies in the real estate sector, steady growth is expected in the demand for steel from industries such as automobile, household appliances, shipbuilding, and energy, which will help the total demand for steel to stabilize and recover. Supply constraints are expected to continue Industry profits have been declining since 2021, with three consecutive years of losses. Some end-of-line steel companies are now facing cash flow losses, highlighting the fragility of the supply chain. Policies are further strengthening expectations of anti-internal competition, as the industry is expected to see further production cuts or shutdowns in 2026. From a policy perspective, ultra-low emission transformations and environmental policies, including long-term carbon neutrality policies, will reshape the industry's competitive landscape. The company sees potential for leading companies with environmental and low-carbon advantages. Additionally, as the industry accelerates mergers and acquisitions, increased industry concentration will lead to long-term profit recovery. Leading rise, cost improvement With changes in demand structure, the demand for high-end plate steel from industries such as automobiles, household appliances, shipbuilding, offshore engineering, and energy is increasing steadily. Leading companies are proactively adjusting product structures, focusing on research and development, and investing in capital and equipment to improve the added value and profitability. While most steel companies are facing marginal losses, leading companies continue to maintain higher profit levels due to cost advantages from product differentiation and management. The rise and differentiation of industry leaders is evident. As capital expenditure decreases significantly, profits of leading companies will gradually be transformed into shareholder returns through dividends and repurchases. On the cost side, with gradual supply increases and limited demand improvements, iron ore is entering a loose cycle, gradually improving factors constraining steel costs. Risks: Supply constraints are not as expected, sharp declines in demand.