Hua Long Securities: Precise policy regulation to prevent inward spiraling, leading steel companies enhance quality and efficiency to seize opportunities.

Huaxia Securities released a research report stating that production control on the supply side combined with a more proactive fiscal policy is expected to boost the valuation of the sector. On the demand side, steel demand for construction is stabilizing, while steel demand for manufacturing is improving. The export mode of trading price for quantity is expected to transition towards high-end and indirect modes. On the supply side, the elimination of outdated production capacity is expected to increase the concentration of top enterprises. Structural adjustment of production and high-quality product development are inevitable trends for industry transformation, thus maintaining a "buy" rating on the steel industry. The main points of view of Huaxia Securities are as follows: Supply side By 2025, the steel industry will continue to introduce relevant regulatory policies, emphasizing innovative capacity governance compared to the supply-side reform in 2016 and production control policy in 2021. The policy focus has shifted from clearing out "capacity" in 2016 to controlling current "production" in 2021, and looking towards future "quality" and "structure" in 2025. This signifies a more refined and long-term industry governance. As of November 2025, the national crude steel production totaled 890 million tons, a year-on-year decrease of 4.04%, and a decrease of 38 million tons compared to the same period in 2025. Industry self-discipline has increased, and the supply is expected to continue tightening in 2026. Demand side By 2025, steel exports have become an important direction to alleviate the supply-demand imbalance in the domestic steel market. As of October 2025, China's cumulative steel exports reached approximately 110 million tons, a year-on-year increase of 13.29 million tons, with net steel exports accounting for about 13% of crude steel production, approaching the high point of 15% before the supply-side reform in 2015. Despite a contraction in real estate investment, project initiations, and completions, the demand for construction steel is showing signs of stabilization. The demand for manufacturing steel is expected to remain robust, driven by industries such as automobiles, home appliances, and shipbuilding. Additionally, new infrastructure projects such as wind power, photovoltaic, and 5G are increasing the demand for steel, boosting the consumption of coated, galvanized, stripe, and shaped steel. As debt conversion efforts move into the later stages in 2026, the "crowding out effect" used for repayment and debt clearance within special bonds may decrease marginally, potentially strengthening domestic demand. The issuance of steel export permits may curb the oversupply of low-end steel products, leading to a possible narrowing in the growth of steel demand both domestically and abroad. Cost side Iron ore: Global demand for iron ore is expected to decline overall. The upgrading of China's industrial structure and capacity replacement are gradually reducing the overall market demand for steel. The growth in steel demand in other emerging countries is unlikely to offset China's decline. The supply-demand disparity in the global iron ore market from 2025 to 2030 is expected to widen further, potentially putting downward pressure on iron ore prices. Coking coal: In the first half of 2025, loose supply of coking coal suppressed prices. The price drivers for coking coal are primarily driven by active and passive supply constraints rather than strong demand growth. It is expected that coking coal prices will fluctuate within a relatively reasonable range in 2026, with limited upward potential. Scrap steel: The price trend for scrap steel in 2025 was stable with no significant fluctuations. It is expected to continue to fluctuate within a narrow range in 2026, with a low probability of large price swings. Profit margins for both upstream and downstream sectors continue to be under pressure, and overall price levels may continue to decline. Risk warning: Unexpected downturn in downstream demand, failure to clear outdated capacity, unforeseen policy changes, deteriorating geopolitical environment, frequent extreme weather events, and citation risks in data references.