There is upward pressure on international steel prices in the conflict between Russia and Ukraine. Pu Steel and Special Steel all have investment opportunities. [institutional Review]

Weekly comments on the Iron and Steel Industry

Geographical conflicts disturb the industrial chain, and international steel prices are facing upward pressure.

After fierce clashes between Russia and Ukraine this week, Europe and the United States imposed severe sanctions on Russia, triggering sharp turmoil in global commodity and financial markets. Russia and Ukraine are both big steel producers and major international steel exporters. According to the World Steel Association, Russia and Ukraine produced 76 million tons and 21.4 million tons of crude steel respectively in 2021, ranking fifth and 14th in the world, accounting for 3.9% and 1.1% of the world's total crude steel output, respectively. At present, the conflict has led to the suspension of production and the interruption of logistics and transportation in most steel mills in Ukraine, while Russia's domestic production has not been greatly affected, but the relevant sanctions from Europe and the United States will seriously restrict its export capacity of related products, and there are even reports that the United States is reconsidering removing Russia from the SWIFT international settlement system, which, if implemented, will seriously disrupt international trade and trigger commodity prices to soar. From the perspective of the iron and steel industry chain, the CIS countries exported 40.6 million tons of steel to other regions in 2020, accounting for 17.2% of the global steel trade volume (the same caliber ratio). The main export destinations were Europe (including the European Union), North American free trade area, Africa and so on. The export volume was 19 million tons, 2.6 million tons and 4.1 million tons respectively. Among them, the European Union is highly dependent on CIS steel imports. in 2020, 39.5% of its steel imports came from the CIS, while according to a report released by EUROFER (European Union of Iron and Steel Industry) in February this year, (Economic and steel market outlook 2022-2023), the EU imported an average of 339000 tons and 219000 tons of finished products from the Russian Federation and Ukraine in the first 11 months of 2021. Accounted for 12.8% and 8.3% of its steel imports respectively. As a result, current tensions and possible future sanctions will prevent the EU from purchasing steel from Russia and Ukraine and will be forced to turn to other regional supplies, pushing up steel prices on the international market. On February 25, Platts Energy reported that Brazilian pig iron export prices had risen by 6% due to the conflict between Russia and Ukraine. As far as the Chinese market is concerned, China's steel imports from Russia and Ukraine in 2021 are 526 tons and 56000 tons respectively, and the import quantity is relatively small, which has little impact on the finished product market. However, the number of billets imported from Russia and Ukraine reached 278000 tons and 772000 tons respectively, accounting for 7.6% of China's total billet imports. At present, Tangshan billets are at a historically low level. The tightening of external supplementary channels may have a greater impact on billet prices on a marginal basis. From the perspective of the raw material market, according to the World Steel Association, the iron ore production of Russia and Ukraine in 2020 was 78.49 million tons and 111 million tons respectively, accounting for 3.4% and 4.7% of the total global iron ore production, and the export volume was 46.29 million tons and 25.73 million tons respectively, accounting for 3.1% and 1.7% of the total iron ore trade volume. In 2021, China imported 17.44 million tons of iron ore from Russia and 8.5 million tons from Ukraine, accounting for 2.4% of China's iron ore imports. From the perspective of international and domestic market share, the supply of iron ore from Russia and Ukraine has little impact on the market. In terms of coking coal, China imported 10.74 million tons of coking coal from Russia in 2021, accounting for about 20% of China's coking coal imports. In the case of tight domestic coking coal supply, Russian coking coal supply also plays a key role in the domestic market.

The callback does not change the long-term positive trend, dual-control policy or normalization.

The steel market is weak this week. Affected by the "cold wave" at the beginning of the week, large-scale Snow Warning cooled down in China, and rare low temperatures and heavy snow occurred in the southern region in the same period in history, forcing the resumption of outdoor projects to be postponed. At the same time, the two sessions are approaching, and site safety education is a top priority. The rework rate of projects surveyed by the Construction Network in the past century has dropped by 17.3% compared with the same period in the lunar calendar last year, resulting in demand performance falling below market expectations. The accumulation of steel this week is greater than in previous years. After the end of the Winter Olympic Festival, the increase in the resumption of production of steel mills has also increased the downward pressure on the steel market. Looking forward, we believe that the short-term correction will not change the long-term positive trend, and the supply constraint policy will persist. A few days ago, Li Xinchuang, vice president of the China Iron and Steel Association and secretary of the Metallurgical Planning Institute, said that "the regulation and control policy on crude steel production this year may continue, and the regulation principles are still being studied", and the scope may be expanded. "the off-balance-sheet production capacity will also be included in the category of production control, and the policy of double control of production capacity and output in the future will be normalized." at the same time, "energy, carbon emissions and pollutant emissions" will be established.

The multiple constraint mechanism of. From the perspective of macro policies, on February 25, "stability comes first" and "it is necessary to strengthen the implementation of macro policies to stabilize the economic market." it is expected that the relevant policies to stabilize growth will continue to increase, and projects are expected to emerge in large quantities after the two sessions. Although the current high-frequency real estate data is still weak, the Politburo meeting of the CPC Central Committee once again emphasized steady growth, recently reduced the down payment ratio and mortgage interest rates in many places, with the introduction of the policy of stabilizing the property market due to urban policy, the basic bottom of real estate is expected to be formed in the first half of the year, and real estate demand is expected to stabilize and pick up in the second half of the year On the raw material side, on February 18, the National Development and Reform Commission issued a number of opinions on promoting stable industrial growth, clearly proposing to do a good job in "ensuring the supply and price stability of important raw materials and primary products such as iron ore and chemical fertilizers" and "further strengthening the supervision of the spot market during the commodity period." In the context of strict policy controls and its own high inventories, iron ore is expected to continue to transfer reasonable profits to steel mills and domestic manufacturing industries. Generally speaking, we believe that there are two fundamental changes in the iron and steel industry, one is that the output is controlled, the other is that the suppression of iron ore is unprecedented in history, the profit of the black industrial chain is reconstructed, and the general trend of transferring profits from iron ore with the worst fundamentals to steel mills remains unchanged. Steel stocks have long logic, low valuation and high dividends, and profits increased significantly in the first quarter compared with the same period last year. It is suggested that iron and steel stocks should be actively allocated. At the same time, the special steel new material plate has the attribute of long-term growth. Jiuli specialty materials and other targets have import substitution, external share increase, it is worth paying attention to.

Investment suggestions of Pu Iron and Steel Co., Ltd.

The increase of industrial concentration and the superimposed supply constraints make the iron and steel industry change from strong cycle to weak cycle, the profit center of the industry moves upward and the proportion of dividends increases gradually. in the long run, the main driver of the demand side of the iron and steel industry will turn to manufacturing. It is suggested that we should pay attention to the target of low valuation and high dividend (see attached table). In addition, the General Secretary instructed: during the 14th five-year Plan period, pipeline reconstruction and construction must be taken as an important infrastructure project, and the relevant targets may benefit in the future.

Investment suggestions for new materials of special steel:

Different from Pu Steel, special steel is an industry with strong policy support. There is "import substitution" in China's middle and high-end special steel new materials and "global share increase" outside. At present, the proportion of middle and high-end special steel in China is about 4%. Compared with Japan, Europe and other developed countries, there is still a big difference. China's middle and high-end manufacturing industry is developing rapidly, the demand for middle and high-end special steel is expected to grow rapidly, and the valuation of middle and high-end special steel enterprises is expected to be further improved. From the point of view of the valuation of special steel companies in Japan, Hong Kong and the United States, most of them are at a higher level of 15-25 times. The rapid development stage of special steel in Japan, Europe and the United States has passed, while the middle and high-end special steel in China is still in the growth stage and should enjoy a certain valuation premium. Suggested attention: Citic Special Steel, Jiuli Special Materials, Tiangong International, Yongxing Materials, Fushun Special Steel and so on.

Risk analysis: the demand for steel is lower than expected, and the price of raw materials has risen sharply.