Summary: As the "golden September and silver October" peak construction season approaches, demand growth is expected to be boosted, and the profitability of listed companies will improve.
The reporter learned from the China Iron and Steel Association (CISA) that from January to July this year, national steel output and imports continued to grow, steel prices rebounded somewhat, and the steel industry kept improving its operation.
Industry insiders said that the arrival of the "golden September and silver October" peak construction season will boost demand growth, and the profitability of listed companies will improve.
Output growth: According to the operating data for the steel industry from January to July 2020 released by the National Development and Reform Commission, steel output continued to grow. From January to July, national pig iron, crude steel and steel product output were 510.86 million tonnes, 593.17 million tonnes and 723.95 million tonnes respectively, up 3.2%, 2.8% and 3.7% year on year.
Steel imports continued to grow. According to data from the General Administration of Customs, from January to July, China exported 32.88 million tonnes of steel cumulatively, down 17.6% year on year; and imported 9.948 million tonnes of steel cumulatively, up 49.3% year on year.
Meanwhile, imported iron ore prices kept rising. According to customs data, from January to July, China imported 659.555 million tonnes of iron ore, up 11.8% year on year. In July, the average price of imported fines (62% grade) was US$106.53 per tonne, up US$5.76 per tonne month on month, an increase of 5.7%.
According to a report released on August 31 by the Steel Logistics Professional Committee of the China Federation of Logistics and Purchasing, the domestic steel industry PMI stood at 47% in August 2020, down 2.2 percentage points from the previous month. In February this year, the steel PMI dropped by 10.5 percentage points. From March to May, the steel industry accelerated its recovery and the index kept rebounding.
Demand recovery: In the first half of this year, steel prices continued to recover. As of July 31, 2020, China's steel composite price index stood at 104.52%, up from June. Key steel enterprises saw year-on-year profit growth in June and July. From January to July, CISA's key statistical steel enterprises achieved sales revenue of 2.47 trillion yuan, up 3.3% year on year; and realized profits of 86.87 billion yuan, down 28.6% year on year, with the decline continuing to narrow.
A CISA official said that the international steel market has shown obvious signs of recovery recently, and the construction industry will usher in the "golden September and silver October" after overcoming the floods in the south and the high summer temperatures, which will drive growth in construction steel demand. Overall, China's steel industry is expected to continue operating steadily and achieve its annual production and operation targets.
Recently, Anyang in Henan, Tangshan in Hebei, Linfen in Shanxi and other places have successively introduced new production restriction plans, launching a new round of production curbs. Market participants expect steel prices to run with a stable but firm bias in the short term.
A CISA leader pointed out that steel demand has exceeded expectations and steel production is running at a high level. In particular, steel products used in industrial production grew rapidly, showing the pulling effect of the fast recovery of the manufacturing industry on steel demand.
Regarding this year's steel demand, Zheng Yuchun, deputy director of the Metallurgical Industry Economic Development Research Center, said that China's steel demand is mainly concentrated in the two major fields of construction and machinery. The construction field is greatly affected by infrastructure investment, and traditional infrastructure investment remains an important force driving fixed-asset investment.
In the machinery manufacturing industry, the value-added of the machinery industry decreased by 1.5% year on year in the first half of this year, significantly narrowing by 17.5 percentage points from the first quarter. In June, the value-added of the machinery industry increased by 9% year on year, 4.2 and 3.9 percentage points higher than the national industry and manufacturing industry respectively. The machinery industry economy is expected to show a trend of low growth in the first half and steady recovery in the second half, with indicators such as value-added, operating revenue and total profit expected to increase slightly.
In addition, data for automobiles, home appliances, ships and other industries are improving. With increasing investment, steel demand will rise.
Zheng Yuchun said that in 2019, China's apparent crude steel consumption was 942 million tonnes, an increase of 73 million tonnes, up 8.3% year on year. It is estimated that crude steel demand will increase by 30-45 million tonnes in 2020, up 3.2%-4.8% year on year.
Earnings improvement: Looking at the performance of listed companies, the second-quarter net profits of ordinary steel and special steel enterprises both recovered from the first quarter. Special steel enterprises, benefiting from weaker cyclicality, stable downstream demand and a relatively small share of raw material costs, saw relatively stable performance and stronger profit recovery than ordinary steel enterprises.
Baosteel, Valin Iron & Steel, CITIC Special Steel, Sansteel Minguang, Nanjing Iron & Steel and Xinyu Iron & Steel all posted net profits exceeding 1 billion yuan in their semi-annual reports, leading the industry in profit scale.
Baosteel's net profit in the first half of the year was 4.002 billion yuan. The company said that in the second quarter, steel demand rebounded as the resumption of work and production accelerated. However, affected by high inventories and shrinking overseas demand, steel prices fell further from April to May, and stabilized and rebounded in June supported by demand. In the first half of the year, the company produced 21.993 million tonnes of iron, 23.457 million tonnes of crude steel, and sold 22.324 million tonnes of commercial billets and rolled products.
Jinzhou Pipe, ST Fushun Steel, Guangda Special Materials, Valin Iron & Steel and Jiuli Special Material all saw their semi-annual net profit growth exceed 20%. Among them, Jinzhou Pipe led the industry with net profit growth of 274.82% in the first half of the year. The company said that the assets of Huzhou Jinzhou Company were expropriated, resulting in large asset disposal gains and a significant increase in non-recurring gains and losses. The company achieved operating revenue of 2.1 billion yuan, down 12.99% year on year; operating costs of 1.75 billion yuan, down 15.37% year on year; and net profit of 357 million yuan, up 274.82%.
In terms of return on equity, Jinzhou Pipe, Fangda Special Steel, CITIC Special Steel and Valin Iron & Steel all recorded ROE above 10%.
Industry insiders said that the "golden September and silver October" period is the traditional peak season for the industry, with market demand guaranteed and steel production running at a high level. However, raw material costs are unlikely to fall in the short term. Supported by raw materials and demand, steel prices are expected to show a volatile but firm trend.
Industrial Securities believes that manufacturers are confident in the recovery of demand. Considering the large-scale fiscal capital injection in the coming months, the continued improvement in the profitability of industrial enterprises, better weather conditions and the arrival of the peak construction season, there is a high probability of an explosive surge in demand.