CICC: Steel capacity replacement is becoming stricter, and the industry's supply transformation is underway

According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that recently, the Ministry of Industry and Information Technology published the "Implementation Measures for Capacity Replacement in the Steel Industry (Draft for Comments)", revising the 2021 version. With the continuous tightening of capacity replacement policies in recent years, the announced replacement ratio in the steel industry has been declining year by year, and the scale of replacement capacity has also continued to decrease. The introduction of the 2025 capacity replacement measures will further tighten the overall capacity replacement in the steel industry, sending a clear signal to achieve a reduction in steel capacity, and it is expected that the industry's replacement capacity will further decline in the future, with a capacity ceiling already in sight. CICC's main viewpoints are as follows: Capacity replacement is further tightening, and the industry's capacity ceiling is already in sight The capacity replacement ratio is tightening. The 2021 version adopted a graded management approach, with a ratio of no less than 1.5:1 in key areas for air pollution prevention and control, and 1.25:1 in other areas. The 2025 version cancels regional differences, requiring all regions to adhere to a replacement ratio of no less than 1.5:1; 2) Long-term idle capacity that has not been constructed is prohibited from participating in capacity replacement; 3) After two years, trading capacity indicators for replacement will no longer be allowed; 4) New project acceptance will have timely regulations, strengthening the regulatory mechanism. CICC believes that with the continuous tightening of capacity replacement policies in recent years, the announced replacement ratio in the steel industry has been declining year by year, and the scale of replacement capacity has also continued to decrease. The introduction of the 2025 capacity replacement measures will further tighten the overall capacity replacement in the steel industry, sending a clear signal to achieve a reduction in steel capacity, and it is expected that the industry's replacement capacity will further decline in the future, with a capacity ceiling already in sight. Actively encouraging low-carbon metallurgy and mergers and acquisitions, the industry's supply transformation is underway CICC pointed out that the "Implementation Measures" provide preferential policies for replacing blast furnaces with low-carbon processes such as electric furnaces and hydrogen metallurgy, allowing for equivalent capacity replacement, and require replacement projects to be constructed in accordance with benchmark-level energy efficiency and environmental performance A-grade standards, marking the country's encouragement and guidance for low-carbon development in the steel industry. On the other hand, the 2025 replacement implementation measures clearly state that capacity indicator trading replacement will be canceled after 2027, meaning that steel companies with weaker competitiveness will only be able to exit the market through mergers and acquisitions or exit, which is conducive to promoting industry mergers and reshaping the competitive landscape, benefiting core assets with significant competitive advantages. Investment recommendations: Trends outweigh fluctuations, optimistic about the long-term investment value of core assets At the current point in time, the P/B valuation of high-quality core assets is still below book value. Focus on two main lines: 1) Long-cycle dimension, better quality means higher winning rates, and the valuation of core assets in the industry is generally at historical lows, being underestimated by the market. With the profit cycle hitting bottom, a valuation recovery is expected. The top recommendation is Valin Steel (000932.SZ). 2) Short-term dimension, production control within the year and mid-term capacity clearance have a greater marginal impact on rebar companies, suggesting attention to steel companies with higher efficiency and a higher proportion of rebar. Risk factors Unexpected decline in the construction industry chain; unexpected decline in exports; policy implementation not meeting expectations