Iron and steel industry: multiple factors lead to steel prices peaking and falling

Policy pressure, weak demand and a sharp pullback in steel prices

Steel prices fell sharply last week, and the price adjustment was mainly driven by two factors: first, the NDRC intervened in coal prices, administrative controls led to a collective decline in black commodities, and steel prices were affected downwards; second, relevant data last week showed that steel demand was at its lowest level since 2015, and the sluggish peak season was a further drag on steel prices.

Since the second half of the year, due to the impact of the continued downturn in infrastructure and real estate, steel demand is very weak. Although there are signs of recent real estate credit policy easing, the stabilization of steel demand remains to be seen. We believe that the "poor" performance of steel demand has been fully recognized by the market since June, but the core of the sharp ups and downs in steel prices in recent months is affected by supply disturbances: tighter supply drives steel prices up, otherwise prices fall.

From a short-term point of view, the promotion of production and electricity limitation in September is too strong, while the relaxation of the margin in October is a high probability event, and this change in rhythm is difficult to grasp. However, in the medium term, from the previous requirements of the Ministry of Industry and Information Technology to continue to do a good job in crude steel reduction work to the peak production in Beijing, Tianjin and Hebei in winter, the management and control of the steel supply side has never been relaxed, and the industry has evolved from capacity control in the past to production control today, so demand has declined somewhat, but overall profits will remain relatively high.

As far as individual stocks are concerned, we suggest that we should focus on two types of investment opportunities: one is the companies whose own product structure has the potential to optimize and upgrade, such as Shougang shares, TISCO stainless steel, etc.; second, the representatives of low-cost advantages in the industry, such as Fangda Special Steel, and so on. In addition, the current valuation of processing stocks in some sub-areas has been at a low level, with the continuous release of its performance, the stock price is expected to rise again, focusing on Yongjin shares, Mingtai Aluminum and so on.

The mineral price is weak to find the bottom, and the price of coke may usher in an inflection point.

(1) Iron ore: last week, 45 MTR iron ore stocks were 140.4548 million tons, an increase of 1.4729 million tons compared with the previous week. Global shipments of iron ore were 30.611 million tons, an increase of 570000 tons from the previous week, including 15.566 million tons from Australia, an increase of 521000 tons from the previous week, and 5.541 million tons from Brazil, a decrease of 874000 tons from the previous week. At the same time, the output of molten iron in 247 steel mills reached 2.146 million tons last week, down 16000 tons from the previous week. Last week, heating production restrictions were issued in many places, and the average daily output of hot metal fell to 2.1458 million tons. Mine prices have weakened as weaker downstream demand has pushed up port inventories by 1.47 million tons this week. As production restrictions and weak terminal demand still have a great impact on iron ore demand, it is currently in a weak bottom-seeking stage; (2) Coke: due to policy crackdown, thermal coal and coking coal prices may usher in a downward adjustment opportunity, coke cost-driven logic is facing the test, coke prices are expected to adjust and fall.

Plate key data tracking

Overall decline in demand: the national average trading volume of construction steel was 1.1644 million tons, down 4800 tons from the previous week.

Supply continued to decline: the national operating rate of blast furnaces (163s) was 53.18%, down 0.83 pct from the previous week; the capacity utilization rate of Tangshan Steel Plant was 66.44%, and the weekly 0.31pct decreased. The weekly output of the five major varieties totaled 8.79 million tons, down 350000 tons from the previous month.

Overall profit decline: last week (10.18-10.22) rebar gross margin 582 yuan, down 140 yuan; hot-rolled plate ton gross margin 448 yuan, down 42 yuan; cold-rolled plate ton gross margin 380 yuan, down 9 yuan; medium and thick plate ton gross margin 304 yuan, up 4 yuan.

Risk tips: a sharp decline in terminal demand, environmental protection production limit policy is not as expected.