CICC: In Q3 2025, strong raw material prices erode profits; focus on the valuation recovery of core steel assets

According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that the steel industry will enter the off-season in Q3 2025, with weak demand. The apparent consumption of the five major steel products in Q3 2025 is expected to be 155.5986 million tons, a year-on-year decrease of 0.9%. At the beginning of the season, as expectations for the exit of industry capacity and production increase, the profitability of steel companies is recovering, and production motivation is strengthening. However, due to the execution of production restrictions falling short of expectations, molten iron remains at a high level, driving up the bottom prices of coking coal, coke, and iron ore, gradually eroding profits due to raw material disturbances. At this point, the P/B valuation of high-quality core assets is still below net asset value, and in the context of the overall market continuously rising, the steel sector remains relatively cheap. The trend is more important than volatility, and the anti-involution market is expected to continue to unfold.

CICC's main viewpoints are as follows:

Forecasting a slight decline in the profitability of key companies in the steel industry in Q3 2025, with a significant year-on-year improvement as production cuts progress slowly, and raw materials strongly eroding profits

The steel industry will enter the off-season in Q3 2025, with weak demand. The apparent consumption of the five major steel products in Q3 2025 is expected to be 155.5986 million tons, a year-on-year decrease of 0.9%. At the beginning of the season, as expectations for the exit of industry capacity and production increase, the profitability of steel companies is recovering, and production motivation is strengthening. However, due to the execution of production restrictions falling short of expectations, molten iron remains at a high level, driving up the bottom prices of coking coal, coke, and iron ore, gradually eroding profits. It is predicted that the industry's profitability will decline quarter-on-quarter in Q3 2025, but due to the low base in Q3 2024, a significant year-on-year increase in profitability is expected.

Sector logic: 1) As anti-involution policies are progressively implemented, expectations for the exit of steel production capacity are strengthened, and improvements in supply and demand in the industry are anticipated, with mid-term industry prosperity expected to continue to recover. 2) With the release of low-cost new iron ore production capacity and the continuation of a relaxed supply pattern for coking coal, the downward cycle of raw material prices will persist, with profit distribution in the black series shifting towards finished products.

Preview of 19 key A-share companies in Q3 2025, with a total market value of 651.75 billion yuan, accounting for 67.2% of the total market value of the Shenwan Steel sector

1. General steel: The price recovery of major steel products is significant, but still insufficient to offset the profit erosion caused by rising costs due to raw material disturbances. CICC estimates that the gross profit margins of long products and flat products will decrease by 33 and 29 yuan/ton quarter-on-quarter, and increase by 159 and 454 yuan/ton year-on-year, respectively. Companies with a high proportion of long products and flat products will see a larger quarter-on-quarter decline in profitability and a more significant year-on-year improvement. In Q3 2025, it is expected that Valin Steel will achieve a net profit attributable to shareholders of 740 million yuan, a quarter-on-quarter decrease of 38%, and a year-on-year increase of 68%.

2. Special steel: Benefiting from high value-added products and sustained growth in manufacturing demand, companies have strong bargaining power and relatively stable profitability.

Trend is more important than volatility, optimistic about the continuous unfolding of the anti-involution steel industry

CICC pointed out that at this point, the P/B valuation of high-quality core assets is still below net asset value, and in the context of the overall market continuously rising, the steel sector remains relatively cheap. CICC believes that the trend is more important than volatility, and the anti-involution market is expected to continue to unfold. The investment mainline focuses on two aspects: 1) Long-cycle dimension: The valuation of core assets in the industry is underestimated, and with profitability bottoming out and supply clearing, a valuation recovery is expected, with a strong recommendation for Valin Steel (000932.SZ); 2) Short-cycle dimension: Production control and capacity clearing within the year will have a greater impact on rebar companies, suggesting attention to steel companies with high efficiency and a high proportion of long products Risk Factors

Downstream demand recovery is less than expected; significant fluctuations in raw material prices; implementation of production restriction policies is not as expected; global macro fluctuations affect export demand