Guosheng released the 2026 mid-year summary for the steel industry: Profitability weakened year-on-year, focus on the strength of counter-cyclical adjustments.

Guosheng released a summary of the steel industry mid-year report for 2026, stating that the report shows a year-on-year decline in steel mill profitability, with a continuing differentiation among sub-sectors. It is expected that after the third quarter, fiscal execution will gradually accelerate to support demand. If subsequent industry policies aimed at "reducing competition" and carbon dual control are strictly enforced, it could reverse the current low profitability of steel companies, leading to excess returns in the sector. This institution previously estimated the reset value of leading companies in the industry, and currently, these companies are at a low absolute valuation position. From a mid-to-long-term value perspective, notable targets include high-quality steel enterprises such as Baoshan Iron & Steel, Nanjing Iron & Steel, Hunan Valin Steel, Fangda Special Steel Technology, and Xinyu Iron & Steel. Guosheng's main points are as follows: Industry Profit: This year's overall policies are similar to last year's but are more focused on structural transformation. The reforms will result in some fiscal contraction, leading to a decrease in the actual degree of fiscal looseness compared to 2025. In the first half of the year, looking at quarterly performance, the domestic GDP grew by 5.0% year-on-year in the first quarter, while the second quarter saw policies entering a contraction observation phase, resulting in a slowdown in growth to 4.3% due to the effects of fiscal contraction. In the first half of the year, weakened steel prices coincided with rising costs, with total industry profits amounting to 31.77 billion yuan, a year-on-year decline of 25%. The gross profit per ton of steel in the first half was 63.5 yuan, down 26.3 yuan year-on-year. The proportion of profitability for steel companies in the upstream and downstream profit distribution fell back to around 7%, far below the average of 21% from 2011 to 2025. Mid-Year Report Situation: In the first half of 2026, listed steel companies saw revenues decrease by 2.5% year-on-year, while costs fell by 1.9%. The larger revenue decline is mainly due to limited production cuts in the industry, with high capacity utilization rates maintained. Additionally, weakened demand in the second quarter impaired the negotiating power of the intermediate smelting sector, which passively accepted price increases for coke and iron ore, leading to additional cost increases. Sample steel companies achieved a net profit of 6.21 billion yuan, a year-on-year decline of 54.7%, and a net profit margin of 0.7%, down 0.8 percentage points year-on-year. Financial reports show a slight increase in the comprehensive period expense ratio for the industry, a modest improvement in debt repayment indicators, a stable year-on-year debt-to-asset ratio, and a slight increase in inventory turnover days, with overall changes being minimal. Clear Differentiation: In the first half of 2026, special steel revenue increased by 2.2%, while revenues from steel pipes and ordinary steel declined by 6.2% and 0.9%, respectively. The gross profit margins for special steel, steel pipes, and ordinary steel decreased by 0.6 percentage points, 2.5 percentage points, and 0.7 percentage points year-on-year to 7.6%, 6.4%, and 5.6%. The differences in profitability primarily stem from the varying characteristics of downstream industries. Steel pipes are widely used in the energy oil and gas industry, and geopolitical conflicts have caused oil valves to close, leading to a temporary decline in demand for oil and gas pipelines in the Middle East. In contrast, demand for special steel remains stable to increasing, and its price sensitivity is weak, supporting profit recovery. Conversely, ordinary steel profitability declined due to weak demand in the second quarter and the less-than-expected implementation of production restriction policies. Since 2021, demand for long products corresponding to construction steel has continued to decline, while demand for flat products corresponding to manufacturing and exports has gradually rebounded, becoming a key contributor to the increase in steel demand. In terms of absolute gross margins and the extent of changes, flat products show stronger profitability. Investment Strategy: Attention should be paid to the subsequent policy implementation of "intensifying and expanding domestic demand, optimizing supply," which is expected to drive a phase of improvement in fundamentals. Economic transformation requires time, and during this period, systemic risk in the economy is not significant, but there are also limited opportunities for a systemic increase in growth. The future will likely see an economy oscillating between recession and recovery, developing a converging pattern. As the economy continues to converge, it is necessary to provide enough stability for structural reforms. Risk Warning: Risks include severe turmoil in the overseas economy, escalating regional geopolitical conflicts, domestic fiscal expenditures falling short of expectations, and poor execution of production restrictions.