Cathay Pacific Haitong: The fundamentals of the steel industry are expected to be gradually repaired by reducing production and removing stocks and building profits

The Zhitong Finance App learned that Cathay Pacific Haitong released a research report saying that steel demand is expected to gradually bottom out; even if the supply side does not consider supply policies, the industry has been losing money for a long time, and market-based supply clean-up has begun to occur, and the bank expects the fundamentals of the steel industry to gradually recover. However, if the supply policy is implemented, the industry's supply shrinks faster, and the upward progress of the industry will unfold faster. Maintain the steel industry's “gain” rating.

Cathay Pacific Haitong's main views are as follows:

Demand declined month-on-month, inventory declined month-on-month

Last week (the previous week in this report refers to the week of December 8 to December 12, 2025) was 8.397 million tons, down 2.83% from month to month, down 4.76% year on year; of these, apparent consumption of building materials was 2.826 million tons, down 172,000 tons from month to month; apparent consumption of board was 5.57 million tons, down 73,000 tons from month to month. Production of the five major types of steel was 8.62 million tons, down 227,000 tons from month to month; total inventory was 13.32 million tons, down 335,000 tons from month to month, maintaining a low level. According to Mysteel data, the operating rate of blast furnaces in 247 steel mills nationwide last week was 78.63%, down 1.53 percentage points from the previous week; the utilization rate of blast furnace production capacity in 247 steel mills nationwide was 85.92%, down 1.16 percentage points from the previous week; the operating rate of electric furnaces last week was 60.26%, up 0.64 percentage points from the previous week; the capacity utilization rate of electric furnaces last week was 52.9%, down 0.33 percentage points from the previous week. Inventories continue to drop.

Profitability declined month-on-month

Last week, 45 Hong Kong imported iron ore stocks of 154.314 million tons, an increase of 1.306 million tons over the previous week. The average gross profit per ton calculated by thread simulation last week was 169.8 yuan/ton, up 22.2 yuan/ton from the previous week, and the average gross profit per ton of hot coil simulation was 30.2 yuan/ton, down 17.8 yuan/ton from the previous week; the profit margin of 247 steel companies last week was 35.93%, down 0.43 percentage points from the previous week.

As China's pig iron production declines, demand for iron ore may slow down, and supply will increase when the Simandou iron ore is put into operation. According to the commissioning schedule of the Simandou iron ore, there may be about 25 million tons of iron powder production in 2026. Secondly, domestic mines invested in previous years will also increase the supply of iron ore.

Demand is expected to stabilize, and supply is expected to shrink

Demand is expected to stabilize, and supply is expected to contract. As real estate declines, the share of steel demand on the real estate side continues to decline, and the bank expects that the negative impact of real estate on steel demand has clearly weakened; demand for steel in infrastructure and manufacturing is expected to grow steadily. Looking at the supply side, at present, about 65% of steel companies in the industry are still losing money, and market-based supply clean-up has already begun to emerge. From a policy perspective, the “Work Plan for Steady Growth in the Steel Industry (2025-2026)” recently issued by the Ministry of Industry and Information Technology proposes to “continue to implement production reduction policies, implement annual production control tasks in accordance with the principle of supporting the development of advanced enterprises and forcing the exit of backward and inefficient production capacity, and promote the dynamic balance between supply and demand.” The bank maintains expectations of supply-side contraction, and steel fundamentals are expected to gradually recover.

Maintaining an “Overweight” rating

In the long run, increasing industrial concentration and promoting high-quality development is an inevitable trend in the future development of the steel industry. Steel companies with product structure and cost advantages will fully benefit; in the context of increased environmental protection, ultra-low emission transformation, and carbon neutrality, the competitive advantages and profitability of leading companies will become more prominent. Key recommendations: 1) Baosteel shares with leading technology and product structure; Valin Steel and Shougang shares, which have continuously upgraded product structures; 2) CITIC Special Steel and Yongjin Co., Ltd., leading special steel companies with low valuations and high dividends with competitive advantages; high wall materials companies Jiuli Special Materials, Xianglou New Materials, and Platinum New Materials; high wall materials companies; leading high temperature alloy leaders Tunan Co., Ltd.; 3) Under the long-term trend of demand recovery, we are optimistic about upstream resource steel products with competitive advantages Resources, Dazhong Mining, Anning Co., Ltd., Ordos, Yongxing Materials, Baogang Co., Ltd.

Risk warning: supply-side contraction fell short of expectations, and demand dropped sharply.