Huachuang Securities: Seasonal off-peak characteristics are emerging, and there is still support at the bottom of steel prices

According to Zhitong Finance APP, Huachuang Securities released a research report stating that due to high temperatures and rainy weather in the south, demand has continued to weaken as it enters the off-season in June. While demand weakens, some steel mills are reducing production intensity by increasing maintenance, leading to a continuous decline in molten iron output and finished product output. In the short term, after entering June, the decline in demand has preceded the reduction in steel mill output, resulting in weak fluctuations in steel prices. In terms of steel prices, market demand is marginally declining in the off-season, weakening the support for steel prices, which are experiencing weak fluctuations.

Looking ahead to the market, there is still slight room for demand to decline, but considering that demand reacts to off-season characteristics earlier than supply, the subsequent marginal changes in supply and demand relationships may improve. Although the short-term upward momentum for steel prices is not strong, if supply accelerates its decline, it will still support the bottom steel prices. In the short term, the judgment of weak fluctuations in steel prices is maintained. However, demand is influenced by Israel's attacks on Iran, which weakly drives up the prices of bulk commodities (iron ore, coal), and the rise in raw material prices may provide cost support for steel prices.

The main points of Huachuang Securities are as follows:

Both supply and demand are weak, and steel prices are fluctuating at the bottom

Event: As of June 13, the prices of the five major varieties of rebar, wire rod, hot-rolled, cold-rolled, and medium plate were reported at 3,208 yuan/ton, 3,544 yuan/ton, 3,198 yuan/ton, 3,623 yuan/ton, and 3,421 yuan/ton, respectively, with week-on-week changes of -0.33%, -0.40%, -0.80%, -0.64%, and -0.87%. Last week, the output of the five major varieties was 8.5885 million tons, a week-on-week decrease of 215,300 tons. The daily average molten iron output of 247 steel enterprises was 2.4161 million tons, a week-on-week decrease of 190 tons, with a blast furnace capacity utilization rate of 90.58%, a week-on-week decrease of 0.07 percentage points, and a blast furnace operating rate of 83.41%, a week-on-week decrease of 0.15 percentage points. For short-process enterprises, the electric furnace capacity utilization rate was 56.73%, a week-on-week decrease of 1.97 percentage points, and the electric furnace operating rate was 74.01%, a week-on-week decrease of 2.68 percentage points.

In terms of inventory, last week the total steel inventory was 13.5456 million tons, a week-on-week decrease of 92,500 tons. Among them, social inventory decreased by 35,300 tons to 9.2748 million tons; steel mill inventory decreased by 57,200 tons to 4.2708 million tons. On the demand side, the total consumption of the five major materials last week was 8.681 million tons, a week-on-week decrease of 140,700 tons. Among them, the apparent consumption of rebar, wire rod, hot-rolled, cold-rolled, and medium plate last week changed week-on-week by -90,600 tons, -19,500 tons, -10,400 tons, -2,700 tons, and -17,500 tons, respectively.

On the cost side, according to Steel Union data for 114 steel mills' molten iron costs, the sample steel mills' molten iron cost (excluding tax) last week was 2,321 yuan/ton, a week-on-week decrease of 410 yuan/ton. In terms of gross profit per ton of steel, as of June 13, the gross profit per ton of rebar, hot-rolled sheet, and cold-rolled sheet was +135 yuan/ton, +60 yuan/ton, and -65 yuan/ton, respectively, with week-on-week changes of +36 yuan/ton, +27 yuan/ton, and -3 yuan/ton. According to Mysteel's statistics on the profitability of 247 steel enterprises, last week 58.44% of the sample steel enterprises were profitable, a week-on-week decrease of 0.43 percentage points Fundamentals

Since the beginning of this year, the prices of major raw materials have continued to decline, resulting in a significant reduction in steel mills' costs, which provides some assurance for steel profits. Therefore, the profitability of steel mills has improved. However, currently, demand support is relatively weak, and the recovery in profits mainly comes from cost reductions. If the regulation of crude steel is effectively implemented in the future, industry supply is expected to begin to decline, which will further suppress raw material prices on one hand, and improve the supply-demand relationship to support steel prices, thereby potentially bringing greater elasticity to steel profits.

Investment Recommendations

The overall valuation level of the sector is still relatively low, and some high-quality steel companies have their own price-to-book (PB) ratios at relatively low levels since 2022. At the same time, the industry is currently in a profit recovery phase, and the potential for recovery is expected to increase in the future. Therefore, if industrial contradictions are resolved in the future, the industry is likely to welcome opportunities for both valuation and profit level recovery. Recommended stocks with low PB: Valin Steel (000932.SZ), Shougang (000959.SZ), SANGANG MINGUANG (002110.SZ), xinsteel (600782.SH), and Xinxing Ductile Iron Pipes (000778.SZ). Companies with regional advantages: Zhongnan Shares (000717.SZ), Bayi Steel (600581.SH).

Risk Warning

Policy implementation may fall short of expectations, large-scale resumption of production by steel enterprises, domestic economic recovery may not meet expectations, and significant increases in raw material prices, etc