China Galaxy Securities: The contradiction between supply and demand in the steel industry is intensifying in the medium to long term, accelerating the reform of the supply side of the steel industry.

China Galaxy Securities released a research report stating that the impact of the tariff increase on direct exports from China to the US and steel re-export trade is limited. The short-term weak operation of imported iron ore is expected to reduce raw material costs. In the medium to long term, the intensification of the steel supply-demand imbalance catalyzes industry supply-side reforms. With the increase in concentration in the steel industry, leading companies in the steel sector are expected to benefit from the improvement in the supply-demand structure of the industry. It is recommended to focus on leading companies in the steel sector that benefit from the improvement in the supply-demand structure and related leading companies in the specialty steel sector with good fundamentals. Event: On April 9, 2025, Trump announced that the "equal tariff" on China would be increased to 125% and take immediate effect. On April 11, China announced that the tariff rate on all goods imported from the US would be increased to 125%, and subsequent actions of the US to continue imposing tariffs would be ignored. Since the beginning of this year, the US has imposed tariffs on China five times. Main points of China Galaxy Securities: Low reliance on imported iron ore from the US, short-term raw material costs expected to decrease Small proportion of imported iron ore from the US: China's main sources of iron ore imports are Australia and Brazil, with China importing 1.02 million tons of iron ore from the US in 2024, totaling 995 million yuan, accounting for only 0.11%. The direct impact of this tariff increase on domestic ore supply is extremely low. Short-term weak operation on the cost side On April 2, 2025, Trump signed an administrative order imposing a 10% "minimum benchmark tariff" on trading partners and higher tariffs on some trading partners. According to preliminary estimates by the World Trade Organization, a series of US tariff measures may lead to a 1% overall reduction in global commodity trade volume in 2025. The current round of US tariffs may suppress global industrial demand, leading to weaker steel demand; with iron ore and coke supplies relatively abundant, imported iron ore may operate weakly in the short term, bringing about a reduction in raw material costs, benefiting domestic steel companies. In the medium to long term, mainstream mines may adjust supply strategies in a changing landscape, leading to higher uncertainty in iron ore prices. Limited impact on direct exports to the US and re-export trade Previously, the US tariff barrier on Chinese steel had risen to 60%. According to data from the General Administration of Customs, China's direct steel exports to the US in 2024 was only 890,000 tons, accounting for 0.8% of China's total steel exports. The highest export volume was in cold-rolled products (including cold-rolled, galvanized, coated, and electrical steel) at 262,400 tons, accounting for 29%. Although the US has unifiedly imposed a 25% tariff on steel and aluminum products globally, which raises the cost of exports to the US for all countries, the actual impact on re-export trade with China and other countries is limited. In the medium to long term, the intensification of the steel supply-demand imbalance catalyzes industry supply-side reforms According to data from Steel Home, China's steel industry is currently facing a major imbalance between supply and demand, with the production capacity of main steel products basically exceeding production. Under the equal tariff policy affecting downstream product exports, there will be increased pressure on the fundamental aspects of the domestic steel market in the short term; however, in the medium to long term, it is expected to accelerate the elimination of backward production capacity in the steel industry and improve concentration, forcing Chinese steel companies to accelerate green transformation and high-end breakthroughs. Risk warning: Risks of lower-than-expected demand in downstream real estate and infrastructure; uncertainties in raw material prices such as iron ore and coal; risks of technological innovation in steel smelting; uncertainties in domestic and foreign policies, etc.