Iron and steel industry: Sudden change in supply and demand patterns can help reverse valuation weaknesses

Core tips In the short term, with the deep implementation of the "iron hand policy" of energy saving and emission reduction, the average daily output of crude steel will not rebound on the occasion of a rebound in demand, but will be significantly suppressed. Due to the intervention of the policy, the trend of average daily output of crude steel in the future will inevitably violate the law of rising prices, which will lead to a clear deviation between the daily production of steel and crude steel. Under the condition that the rise in the price of ore was suppressed, the difference between the price of steel and mine was widened and the profitability of the steel mills improved. In the medium and long term, if the government strictly and effectively treats energy-saving and emission reduction during the “12th Five-Year Plan” period, and vigorously eliminates outdated production capacity and effectively controls new steel production capacity, the steel sector valuation disadvantage is expected to be reversed.

Report summary

Unpredictable energy-saving and emission-reduction "iron fist policy" has long been a precursor. As early as the first half of this year, the State Council issued a notice to ensure that the “Eleventh Five-Year Plan” for energy-saving and emission-reduction was implemented. After that, the government decided to reduce or cancel the export tax rebate rate for some low-value-added and high-energy-consuming products, which has already conveyed a very clear signal to the outside world. The signal that the central government is very serious and serious about the issue of energy conservation and emission reduction. Because of the power-restricted production restriction policy, the supply is obviously tight. At least in the short term, the “iron hand policy” of energy-saving and emission reduction has broken the previous expectation of severe imbalance in supply and demand.

Last week, the steel society's stocks fell by about 240,000 tons, including long steel stocks dropped by about 180,000 tons, and sheet stocks decreased by about 60,000 tons. Destocking speed was slightly faster than the weekly average destocking rate from the end of March to the end of May. If this rate of de-inventory advances, by the end of this year, steel society stocks are expected to drop to around 11 million tons. With demand picking up and supply tight, domestic destocking of steel is expected to advance rapidly. Compared with the average daily consumption, steel stocks are expected to quickly return to the historical average for many years, that is, the steel market and steel mill stocks total equivalent to 14 days of consumption.

According to the quarterly pricing mechanism for ore supply signed between the three major mines and domestic steel mills, if the spot price of domestic ore is consolidated in the fourth quarter of this year, the average price of the ore in September-November this year is close to that in June-August. Then the price of the ore agreement in the first quarter of next year will be close to the price in the fourth quarter of this year. From this point of view, the main factor determining the profitability of steel mills in the next six months is steel prices rather than ore prices.

Since this year's energy-saving and emission-reduction pressures have been concentrated in the second half of the year, local governments have introduced some extraordinary measures in order to complete the performance evaluation. They are rather “temporary”, and they have also stimulated a few waves in the market. If, during the “12th Five-Year Plan” period, the government implements a long-term assessment mechanism for normalized assessment and supervision on the issue of energy saving and emission reduction and elimination of backward production capacity, this is a significant benefit for eliminating backward production capacity and controlling new steel production capacity. , It helps to reverse the valuation weaknesses of the steel sector.