Everbright Securities: Backward production capacity withdrawals expectations and renewed emphasis on investment opportunities in the steel sector

The Zhitong Finance App learned that Everbright Securities released a research report saying that on July 1, the 6th meeting of the Central Committee on Finance and Economics emphasized that to further promote the construction of a unified national market, it is necessary to focus on key difficulties, control disorderly competition among enterprises at low prices according to law and regulations, guide enterprises to improve product quality, and promote the orderly exit of backward production capacity. From January to May 2025, the total profit of China's ferrous metal smelting and rolling processing industry was 31,690 billion yuan, turning a year-on-year loss into a profit. The comprehensive gross profit of the steel industry from January to June 2025 was 281 yuan/ton, +52.45% year-on-year. If the steel industry's backward production capacity is withdrawn in an orderly manner, the gross profit of the industry is expected to usher in a further recovery.

Incident: (1) On July 1, 2025, the 6th meeting of the Central Committee on Finance and Economics studied issues such as deepening the construction of a unified national market and high-quality development of the marine economy. The conference emphasized that to further promote the construction of a unified national market, it is necessary to focus on key difficulties, control low price and disorderly competition among enterprises according to law and regulations, guide enterprises to improve product quality and promote the orderly exit of backward production capacity; (2) On July 2, Mysteel investigated the rumor that “Tangshan's July 4-15 sintering machine production limit is 30%”. It indicated that notifications had been received, and most of the remaining steel mills also indicated that there was a possibility that they did.

Domestic steel demand and net exports may weaken further in 2025, with a year-on-year decrease of 34 million tons

(1) Domestic demand: According to the forecast of the Metallurgical Industry Planning Institute, China's steel demand in 2025 is about 850 million tons, -1.5% year-on-year, and a decrease of 13 million tons compared to 2024. (2) Net exports: In 2024, the net domestic steel export volume was 104 million tons (accounting for 10.34% of crude steel production in that year), +25.78% over the same period last year. Since the beginning of 2025, South Korea and Vietnam have implemented anti-dumping policies on some of China's steel exports, compounding the impact of the US imposition of tariffs on Chinese steel. Everbright Securities predicts that net steel exports in 2025 may fall to the level of 2023, compared to -21 million tons year on year.

From January to May 2025, China's crude steel production fell by only 6.98 million tons year on year

Crude steel production from January to May 2025 was 432 million tons, -1.59% year-on-year, a year-on-year decrease of 6.98 million tons. Among them, crude steel production in Hubei, Guangdong, and Hebei decreased the most year on year, at -151, -145, and -1.23 million tons, respectively; while crude steel production in Sichuan increased 1.05 million tons year on year, ranking first in terms of increase.

Review of the policies introduced by the country to limit production capacity and output in the steel industry in 2016 and 2020 and their effects

(1) In 2016, the “Opinions of the State Council on Resolving Excess Production Capacity in the Steel Industry to Achieve Development Out of Poverty” called for “not filing steel projects with additional production capacity under any name or method”, and proposed a goal of eliminating excess steel production capacity of 100 million to 150 million tons in the next 5 years. Furthermore, before filing a new steel smelting project, production capacity replacement must be carried out in accordance with regulations. On May 10 of the same year, the Ministry of Finance issued the “Administrative Measures on Special Reward Funds for Industrial Enterprise Structural Adjustment”. China's steel industry officially entered the full implementation period. In particular, the removal of “steel”” After From June 26 to August 7 of the same year, the General Steel Index rose 33%, and the Shanghai and Shenzhen 300 Index rose 2%. The PB_LF of the General Steel sector and its ratio compared to the PB_LF in the Shanghai and Shenzhen markets reached a maximum of 1.76 and 0.82 in 2017;

(2) In the context of the “double carbon” policy, the Ministry of Industry and Information Technology proposed resolutely reducing crude steel production in December 2020 to ensure a year-on-year decline in crude steel production. From February 10 to March 15, 2021, the General Steel Index rose 35%, and the Shanghai and Shenzhen 300 Index fell 13%. The PB_LF of the general steel sector and its ratio compared to the PB_LF of the Shanghai and Shenzhen markets reached a maximum of 1.62 and 0.76.

The general steel sector's PB_LF still has 23% room compared to the average level since 2013

As of July 2, the PB_LF of the general steel sector was 0.83, with 23% space compared to the average since 2013, and still has 112% and 95% space compared to the 2017 and 2021 highs respectively; the ratio of PB_LF in the Shanghai and Shenzhen markets is 0.52, and there is still 2% space compared to the average since 2013, and there is still 57% and 46% space compared to the 2017 and 2021 highs respectively. Everbright Securities believes that the current sector has limited downward space. In the future, with the further introduction of supply-side policies, the PB_LF sector is expected to further improve.