CICC: Production cuts are expected to advance, reiterating a positive outlook on the steel sector market

According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that recent high-frequency data shows a marginal decline in the commencement of infrastructure projects, making it difficult for steel demand in infrastructure to exceed expectations; downstream demand in the manufacturing sector may maintain a preferred level, while export performance may exceed market expectations supported by cost advantages and strong overseas demand. According to Mysteel, production reduction indicators are gradually being issued from provincial governments to steel mills, with crude steel production in May down 9.1% year-on-year, and daily molten iron output beginning to decline, from a peak of 2.45 million tons in May to 2.41 million tons, with expectations of continued decline in June. Production cuts will improve the supply-demand balance in the industry and promote the recovery of the profit cycle. It is estimated that the gross profit per ton of rebar in May increased by 23 yuan from the previous month to 94 yuan, with expectations of a slight improvement in overall industry profitability in the second quarter, continuing the warming trend. CICC's main viewpoints are as follows: Overall industry demand is relatively weak, with significant differentiation between plate and long products Real estate remains sluggish, with May's monthly sales/start/construction area of commercial housing at 70.53/53.48/47.05 million square meters, down 4.6%/-18.7%/+248.2% year-on-year, respectively. In addition, cement production in May was down 4.1% year-on-year, with monthly production down 8.1%, a widening decline of 3.1 percentage points, confirming weak downstream demand in real estate. In terms of infrastructure, cumulative fixed asset investment in infrastructure in May was up 5.6% year-on-year, maintaining a good level, and as of the end of April, asphalt production was up 6.8% year-on-year. Overall, steel demand in the construction industry is weak, with infrastructure performing better than real estate. In the manufacturing sector, the manufacturing PMI in May increased by 0.5 percentage points to 49.5, with strong production and sales in the automotive and machinery sectors, while home appliances showed slight weakness, indicating that steel demand in manufacturing is expected to maintain a good level. It is noteworthy that the net export volume of steel in May increased by 10.32% year-on-year, primarily due to strong global steel demand and the increasingly significant domestic steel cost advantage supported by declining raw material prices amid trade frictions. Looking ahead, the pattern of strong plates and weak long products is unlikely to change in the short term. Recent high-frequency data shows a marginal decline in the commencement of infrastructure projects, making it difficult for steel demand in infrastructure to exceed expectations; downstream demand in the manufacturing sector may maintain a preferred level, while export performance may exceed market expectations supported by cost advantages and strong overseas demand. Supply-side reductions are expected to advance, and the industry's profit cycle is expected to recover In the "task list" issued by the National Development and Reform Commission in March 2025, "continuing to implement crude steel production control and promoting the reduction and restructuring of the steel industry" was listed as one of the tasks to promote the transformation and upgrading of traditional industries, marking the first mention since the industry entered a downward cycle in 2021. According to Mysteel, production reduction indicators are gradually being issued from provincial governments to steel mills, with crude steel production in May down 9.1% year-on-year, and daily molten iron output beginning to decline, from a peak of 2.45 million tons in May to 2.41 million tons, with expectations of continued decline in June. Production cuts will improve the supply-demand balance in the industry and promote the recovery of the profit cycle. It is estimated that the gross profit per ton of rebar in May increased by 23 yuan from the previous month to 94 yuan, with expectations of a slight improvement in overall industry profitability in the second quarter, continuing the warming trend Investment Advice: Reiterate Bullish Core Logic The sector currently exhibits a three-low pattern of low profitability, low valuation, and low allocation, presenting a favorable risk-reward ratio; the catalyst is the implementation of production control; under low inventory conditions, production control is expected to improve the oversupply situation and alleviate the profit erosion from raw materials, making the recovery of the profit cycle worth looking forward to, with fundamental support; the government's determination to promote crude steel production control is evident, and in the long term, production control and differentiated management will accelerate industry clearing and concentration towards leading companies, providing a long-term investment logic that outweighs short-term fundamental changes. At the current juncture, the steel sector remains sufficiently low, with marginal improvements in fundamentals, and supply-side reductions are expected to advance, making this a good left-side entry point. In terms of targets, we recommend Valin Steel (000932.SZ), which has a favorable risk-reward ratio and high safety margin, and suggest paying attention to Hebei Iron and Steel Co., Ltd. (000709.SZ), which has locational advantages and strong profit elasticity. Risk Factors Unexpected decline in the construction industry chain; unexpected decline in exports; policy implementation falling short of expectations