Latest analysis on the steel industry by Citibank: Under the "pressure test" of tariffs, why have these two steel companies become the "top choices"?

Citigroup has released the latest industry analysis report on the steel industry, stating that the Chinese steel industry is facing pressure from the US tariffs and global economic slowdown. However, the impact could be mitigated through Supply-Side Reform 2.0 (expected to cut 50 million tons of capacity) and domestic stimulus policies. The industry is undergoing differentiation, with a positive outlook for Baosteel and China Steel, which have a higher proportion of high-end products and are less affected by tariffs, while a cautious optimism is held for Angang Steel and Magang. A decrease in raw material costs could support profit margins, but attention should be paid to potential policy changes and changes in supply-demand balance. Citigroup's Viewpoint For months, Citigroup has been advocating for Supply-Side Reform 2.0 in the steel industry. Citigroup believes that the tariff war requires China to introduce more decisive policies on both demand and supply sides. Citigroup expects a reduction of 50 million tons of steel supply under baseline conditions, coupled with potential further stimulus policies for domestic demand, to largely alleviate the imminent adverse factors of US tariffs and potential global economic recession. Citigroup maintains a positive view on the steel industry but has adjusted its preference order within the industry. Compared to Magang and Angang Steel, Citigroup favors China Steel and Baosteel. Export target of 70 million tons by 2025 has upside potential (38% completed in Q1), mainly due to demand pre-positioning and regional supply gaps. The industry's optimistic outlook remains, with implications for profit margin repair, but attention is needed for potential policy escalation and changes in supply-demand balance. Citigroup's Preferred Chinese Steel Stocks: China Steel and Baosteel have emerged as top choices. China Steel is being monitored for a potential catalyst for a 30-day upward trend observation period due to minimal impact from US tariffs and anti-dumping risks from South Korea and Vietnam, among other reasons. Baosteel is also favored for its high proportion of high-end steel products and dividend commitments. Magang: Citigroup sees potential merger catalysts for Magang, although its potential profit margin may lag behind Baosteel. Citigroup maintains a buy rating for Magang H shares and a neutral rating for Magang A shares. Key Issues of Investor Concern: 1. With possible domestic supply returning to the market and intensified domestic competition, will "internal curl competition" worsen? 2. Upside risks to the 70 million tons export target for the 2025 fiscal year? Overall, Citigroup remains optimistic about the Chinese steel industry, with expectations of stronger stimulus policies, potential supply restrictions, and achievable export targets.Steel exports from the continent increased by 33% compared to the same period last year. In the first two months of 2025, Mexico and Brazil accounted for 33% of steel imports to the United States (up from 28% in 2024). Citigroup believes that this is partly due to pre-positioning of demand.Meeting regional demand growth stagnation: CKH HOLDINGS supply interruption: Looking at the regional export data of Chinese steel, in the first two months of 2025, China increased its steel exports to regions such as the Middle East and Africa to meet the growing local demand. Due to restrictions on electricity and natural gas consumption, in February 2025, Iran's steel production decreased by 23% month-on-month and 22% year-on-year. Citibank believes that Chinese steel exports can effectively cope with supply disruptions. Is a reduction of 50 million tons enough to balance the market? Previously, Citibank expected that a reduction of 50 million tons in supply could tighten the domestic market supply and demand, providing strong support for the rise in average steel selling price (ASP) and profit margins. Currently, given (1) the sustained downturn in real estate demand; (2) risks faced by both direct and indirect exports in the context of additional tariffs and potential global economic recession, investors are curious if a 50 million ton supply cut is enough to alleviate downward risks in the domestic market. Despite the risks, there is still optimism for the Chinese steel industry: Citibank believes that current domestic demand is mixed. Positive factors include the government's potential increase in stimulus measures to boost domestic demand; negative factors include increasing downward pressure on indirect export demand, such as the automotive and manufacturing industries. Based on Citibank's pessimistic scenario (considering US tariffs and global economic downturn), Citibank expects demand to further decrease by 30 million tons. Citibank believes that in the event of a further deterioration in demand in the pessimistic scenario, the steel market may shift from a state of supply-demand balance to slightly oversupply relative to demand, while in the base scenario, the market supply and demand will remain relatively tight. Outlook for steel ASP and profit margins Citibank currently expects that prices will continue to rise as a result of minor improvements in fundamentals, but will still trend upwards as previously predicted. The recovery of profit margins in the future will be primarily driven by declines in raw material costs. Coking coal is the main raw material for steel, accounting for about 23% of the cost structure of steel. In the first quarter of 2025, coking coal prices fell by 17% month-on-month and 41% year-on-year, with an improved supply situation. By the end of 2025, with the commissioning of the Simondou iron ore project bringing an increase in supply, mid-term iron ore prices could face downward pressure. In the future, industry chain profits may be somewhat redistributed. Preferred Stocks: China Steel and Baoshan China Steel (002.TW): Citibank has set a 30-day observation period for catalysts for China Steel for the following reasons: (1) as ASP rises and costs fall, the gross profit margin per ton of steel gradually increases; (2) the negative impact of US tariffs is relatively small, under section 232, the tariff on Taiwanese steel products is 25%, as of April 10, in accordance with the principle of reciprocity, the benchmark tariff for Taiwanese steel products is 10%; (3) unaffected by the increase in anti-dumping tariffs in Korea and Vietnam; (4) from 2025 to 2045, China Steel's power generation business will become a sustainable source of profit growth DRIVE (Citibank expects net profit from the power generation business to be 3-4 billion Taiwan dollars, accounting for approximately 15% of its total net profit in fiscal year 2024). Maintaining a buy rating. Baoshan (600019.SH): Citibank also has a positive view on Baoshan for the following reasons: (1) its high-end steel products have a high proportion; (2) promised dividends of not less than 0.2 yuan per share from 2024 to 2026. Considering the decline in coking coal prices and the strong performance of the automotive and home appliance industries at the beginning of the year, Baoshan's share of high-end products is expected to further increase, and Citibank believes there is upward risk in its performance in the first quarter of 2025. Maintaining a buy rating. Magang (600808.SH/00323): Maintaining a buy rating on Magang's H shares and a neutral rating on Magang's A shares, as Citibank believes that Magang and Baoshan still have potential opportunities for mergers and acquisitions in the future. If the valuation is based on the 1.16 times book value premium when Baoshan acquired Shandong Rizhao Iron and Steel, Magang has potential valuation premium space. Citibank believes that the supply-side reform 2.0 it calls for should also help support the improvement of the company's fundamentals. Ansteel (000898.SZ/00347): Citibank remains optimistic about Ansteel, as it believes that the supply-side reform 2.0 should help support the improvement of the company's fundamentals. However, considering the unfavorable factors brought about by US tariffs and potential global economic recession, its upside potential may weaken. Citibank has removed Ansteel from its preferred stock list.