China Securities: Steel Industry Profits Soar in First Half, Expecting "Anti-Inflation" Policy to Take Effect

According to an intelligence report from China Securities, the profits of black metal smelting and rolling processing industries have already shown a significant turnaround in the first half of this year, reaching RMB 462.8 billion, a year-on-year increase of 13.7 times, with a growth rate of 31% for all 31 industrial categories. The demand for black metals is not pessimistic, and if the "anti-inflation" policy takes effect in the second half of this year, it will accelerate the process of profit recovery. We expect the current steel stocks to remain undervalued.

China Securities' main views are as follows:

This week's market trended upward before adjusting, and "anti-inflation" related industries rose sharply before falling back. The commodity market's coal prices have increased significantly. The commodity market's fluctuations in the first half of this year were caused by economic expectations being stronger than actual conditions, leading to inventory adjustments. With the "anti-inflation" policy expected to take effect in July, the commodity market will see a price increase that will "create" demand and amplify price fluctuations. In the end, the price will become the market's most basic fundamental factor, followed by an adjustment period.

The history of black metal commodities has seen more extreme fluctuations due to industrial speculation, with prices developing in a similar sinusoidal curve pattern. For stocks that are long-term assets, it is necessary to step out of short-term price fluctuations and focus on medium-term production cycles. The past few years' experience of refining industry capital returns has itself become an important condition for supply adjustments.

The profits of black metal smelting and rolling processing industries in the first half of this year have already shown a significant turnaround, reaching RMB 462.8 billion, a year-on-year increase of 13.7 times, with a growth rate of 31% for all 31 industrial categories. The profit recovery process is expected to accelerate if the "anti-inflation" policy takes effect in the second half of this year. We expect steel stocks to remain undervalued.

We still believe that steel stocks are currently undervalued. On July 3rd, Wuhan Iron and Steel released an announcement stating that shareholders' Tai Ping Life Insurance had increased their holdings in Wuhan Iron and Steel through concentrated bidding on the secondary market since January 2025, with a total holding of 34.5 million shares, accounting for 5% of the total outstanding shares.

Steel production has decreased, inventory has turned upward.

This week's national high-temperature furnace capacity utilization rate fell slightly, while electric furnace capacity utilization rate rose. Domestic steel mills' high-temperature furnace capacity utilization rate was 90.2%, down 0.6% from last month and up 0.6% year-on-year; domestic steel mills' electric furnace capacity utilization rate was 54.1%, up 0.6% from last month and up 4.3% year-on-year. The five major varieties of steel production this week were 867.4 million tons, down 0.9% year-on-year. Daily iron ore output decreased by 15,000 tons to 240.7 million tons.

The inventory side shows that this week's social inventory for the five major varieties of steel was 942.4 million tons, up 1.6% from last month and down 25.8% year-on-year; steel mills' inventory was 409.5 million tons, slightly up from last month and down 16.0% year-on-year.

Steel inventory has turned upward, with a gain of 1.2%. Social inventory is significantly accumulated, while steel mills' inventory has increased slightly. This week's apparent consumption for the five major varieties of steel was 852.0 million tons, down 1.9% from last month and down 2.6% year-on-year. Among them, spiral steel apparent consumption was 203.4 million tons, down 6.1% from last month and down 10.4% year-on-year.

We still believe that steel stocks are currently undervalued. According to Wind data, the total investment in coal-fired power generation projects for January-May this year was RMB 567 billion, up 54.0% year-on-year; nuclear power investment completed RMB 453 billion, up 33.4% year-on-year. In the current energy self-control and rapid planning of new energy systems, coal-fired power generation and nuclear power-related targets are expected to benefit significantly.

Targets:

We continue to recommend stocks in the bottom valuation area, such as Wuhan Iron and Steel (000932.SZ), Nanjing Steel (600282.SH), Baosteel (600019.SH), Xinsteel (600782.SH); benefiting from oil and gas, nuclear power, and coal-fired power generation cycles; benefiting from pipe network transformation and steel production increases.

Risk warning:

Domestic production control policies may exceed expectations, downstream demand may not meet expectations, raw material prices may rise above expectations.