Sinolink: Geopolitical disturbances amplify China's long process steel cost advantage, steel profit recovery is expected to gradually take shape in the medium term.

Sinolink released a research report stating that steel demand is transitioning from real estate univariate pricing to a new stage characterized by building support at low levels, releasing manufacturing cycles, and reevaluating export exposure. The significant escalation of natural gas and gas-electricity costs due to the US-Iran geopolitical conflict is shifting the cost curve of overseas production capacity with a higher proportion of EAF and DRI-EAF. China's iron and steel industry, mainly based on blast furnace-basic oxygen furnace, is more anchored in coal, coke, and iron ore costs, with marginal costs relatively stable under external gas-electricity shocks. Looking at supply-demand balance, it is expected that the supply-demand balance from 2026-2028 will converge from loose to balanced, with supply control + investment cycle + export substitution becoming the driving force for balance optimization, and the mid-term foundation for steel profit recovery gradually taking shape. Key points from Sinolink are as follows: Breaking stereotypes: Steel demand is transitioning from real estate univariate pricing to a new stage characterized by building support at low levels, releasing manufacturing cycles, and reevaluating export exposure. From 2021 to 2025, cumulative new housing starts have decreased by about 70%, with real estate steel accounting for approximately 10% of total demand, shifting from rapid decline to a prolonged decline for rebar and wire rod; infrastructure continues to stabilize the lower end of the building sector, with fiscal capacity and coverage levels still retaining medium-term space. Manufacturing becomes a core source of demand elasticity: Automobiles and home appliances rely on stock levels, intelligence, and replacement of old with new to provide a stable base for sheet metal; equipment demand experiences replacement + prosperity dual cycles, with a natural replacement cycle of 25-30 years, further driven by high mineral resource capital expenditure transmission for engineering machinery, and support for ships due to ton-mile expansions and route disruptions. In terms of external demand, direct steel exports help buffer domestic supply-demand imbalances, while exports of steel-containing products constitute a larger implicit exposure, with the total steel export exposure exceeding 30%. In summary, demand overall is still constrained by real estate clearance, but the structural quality has undergone significant optimization. Reconstruction of the energy pattern in the industry dimension: Short-process steel in the US may be squeezed out in the face of inflation in electricity prices and access constraints triggered by AI computing power expansion Tariffs in the US represent a systemic counterattack to the existing division of labor under industrial hollowing-out, while the AI revolution in high-tech and service industries is expected to rebuild comparative advantages and compete with traditional industries for electric power resources. The US tariff system limits China's direct steel exports to the US, shifting from steel-containing goods to finished products, third-country processing, and the global manufacturing chain. According to Sinolink's estimates, by 2024, China's direct steel exports to the US will be only about 470,000 tons; however, steel-containing products such as automobiles, home appliances, machinery, and metal products are still embedded in American consumption, with an estimated 3.877 million tons taking the route of processed goods and 1.417 million tons taking the route of third-country transfers. The EPRI projects that electricity consumption in US data centers could increase to 9%-17% of total electricity generation by 2030, with regional concentration of load leading to higher industrial electricity prices, capacity costs, and long-term power purchase agreement costs. EAF steel mills typically consume 400-500 kWh per ton, with short-process steel plants in states like Virginia, Oregon, Nebraska, Iowa, New Jersey, and Utah facing stronger pressure to squeeze out, while steel-containing products and third-country supply chains will continue to meet US terminal demand. Disturbance of the energy pattern in the regional dimension: Amplifying China's cost advantage in long-process steel and shifting exports from low-price digestion channels to profit recovery channels The US-Iran geopolitical conflict has significantly raised natural gas and gas-electricity costs, leading to a rightward shift in the cost curve of overseas production capacity with a higher proportion of EAF and DRI-EAF. China's iron and steel industry, mainly based on blast furnace-basic oxygen furnace, is more anchored in coal, coke, and iron ore costs, with marginal costs relatively stable under external gas-electricity shocks. According to Sinolink's calculations, after the rise in gas and electricity prices, the cost of 128 million tons of EAF production capacity located in Europe, Japan, South Korea, and Turkey has significantly increased, with theoretical inflationary pressure on DRI technology exceeding $100, but Iran and Saudi Arabia have their own gas supply and strict control over local gas prices, resulting in a relatively stable actual cost of 38 million tons of gas-based DRI. Steel prices have risen on the international market since April, leading to an expansion in price differentials between domestic and foreign markets, indicating that the arbitrage logic has begun to evolve from the export side. Looking at the supply-demand balance, it is expected that the supply-demand balance from 2026-2028 will converge from loose to balanced, with supply control + investment cycle + export substitution becoming the driving force for balance optimization, and the mid-term foundation for steel profit recovery gradually taking shape. It is worth mentioning that the logic of the energy pattern reconstruction is fundamentally applicable to the entire Chinese industrial system, so there is also optimism for the strengthening of China's manufacturing industry globally. Risk factors Risk of export policy and trade friction; escalated costs due to geopolitical conflict and suppressed end demand; smooth absorption of additional power sources and transmission capacity in US data centers, leading to lower-than-expected pressure to squeeze out short-process steel overseas.