Cinda: The steel sector has strong "anti-insourcing" attributes and a large profit recovery space, maintaining a "positive outlook" rating for the industry.

Cinda released a research report stating that, based on the analysis of the steel industry cycle, as of now, in an environment where the PPI is at the bottom of the cycle, market liquidity is ample, and risk premiums are being adjusted upwards, the steel sector has strong "anti-hollowing out" attributes and significant profit recovery potential. High-quality steel companies have shown excellent upward elasticity brought about by performance recovery, and also have potential for sector valuation uplift due to supply structure improvements. The sector still presents long-term strategic investment opportunities, maintaining a "positive outlook" rating for the industry. Key points from Cinda are as follows: - The steel industry demonstrates a trend of decreasing supply and demand, optimizing structure, and improving profit margins. - Supply side: Total contraction + differentiation of structure, weak growth trend in capital expenditure continues. Influenced by multiple factors such as the policy direction of "anti-hollowing out", downturn in real estate industry, and limited support for infrastructure construction, capital expenditure in the steel industry has slowed down continuously for four years, and is expected to further fall into negative growth territory by 2025. In terms of production volume, from January to October, the national crude steel production reached 820 million tons, a decrease of 3.9% year-on-year, with a clear trend of high production followed by low production on a monthly basis. There is a significant differentiation in structure, with manufacturing steel and construction steel showing opposite trends. High-end manufacturing steel products such as cold-rolled sheets, seamless steel pipes, and electrical steel strip have shown the highest growth rates, while the production of construction steel bars has dropped by about 1.2% year-on-year, reflecting a shift in the industry's supply structure towards high value-added sectors. - Demand side: Domestic demand continues to shrink, with marginal weakening of the effects of special bonds, making exports an important driver. Domestic crude steel consumption has continued to decline, with domestic demand for crude steel reaching 710 million tons from January to October 2025, a decrease of 6.4% year-on-year. Traditional steel sectors continue to show weak demand: steel demand in the real estate and infrastructure sectors continues to shrink, with new construction areas in real estate and total construction area decreasing to 37 million square meters and 44 million square meters respectively in October 2025; although local government net financing scale of special bonds remains high, the focus of fund allocation is shifting towards debt resolution, significantly weakening the stimulating effect on steel consumption. Exports have become a core support for the stability of the steel industry. From January to October, China's steel exports reached 97.74 million tons, a year-on-year increase of 6.4%, and the bank predicts that the annual export volume will exceed 1.1 billion tons again, effectively offsetting the downward pressure on domestic demand; meanwhile, changes in the trade environment have not significantly restricted exports, providing important support for industry supply-demand balance. - Profit side: Under the re-distribution pattern of profits in the coal-coke-steel industry chain, the steel industry's profit margin has significantly improved. In 2025, the overall average steel price has shifted downwards, with general steel prices showing a trend of high then low, with the comprehensive steel price reaching 3,447 yuan per ton as of November 24, a decrease of about 200 yuan per ton from the beginning of the year. Profit recovery logic is clear: Benefiting from the annual decline in prices of raw materials such as coking coal and iron ore, the steel industry is gradually moving away from the low level territory since 2022, with the industry's gross profit margin reaching 6.4% in the third quarter of 2025, at the 45th percentile level since 2012. In terms of profit scale, from January to October 2025, profits of scale enterprises in the ferrous metal smelting and rolling processing industry reached 105.3 billion yuan, a significant increase from the same period in 2024. It is important to note that the steel industry, as a key industry targeted by the anti-hollowing out policy, is expected to continue to move away from the "hollowing out" dilemma of low-level homogenization competition under the dual effects of policy guidance and market self-regulation, transitioning towards a "new" stage of high-quality development. On the one hand, by strictly controlling new capacity, promoting capacity replacement, optimizing capital expenditure structure, focusing on continuous upgrading and transformation in the areas of high efficiency and low emissions, low-level redundant construction is curbed from the source; on the other hand, supply structure is accelerating towards higher value-added sectors, with strong growth in high-end manufacturing steel products such as cold-rolled sheets, electrical steel strip, while the differentiation trend in construction steel highlights the industry's transition from "scale dependence" to "value competition". It is necessary for the steel industry to guide steel prices to a reasonable range as part of the anti-hollowing out measures or as one of the necessary conditions for PPI turning positive As a fundamental raw material in the industrial sector, fluctuations in steel prices have a significant impact on the transmission of PPI (Producer Price Index) - its price trend directly affects the cost of manufacturing industries in the midstream and the pricing logic of downstream end-users, making it one of the core driving factors behind PPI changes. From this perspective, by guiding industry supply-demand structure optimization and stabilizing steel prices (avoiding large fluctuations or continuous declines) through anti-hollowing out policies, it may become an important factor in pushing PPI gradually back into positive territory. The steel industry accounts for about 5.9% of the weight in the PPI, and its price fluctuations have a significant transmission effect on the PPI, with fluctuation amplitudes usually higher than most industries. This is mainly due to the wide coverage of downstream steel demand, penetrating through various sectors such as real estate, infrastructure, home appliances, automobiles, etc., into all aspects of the economy and society. From January to September 2025, the cumulative year-on-year change in PPI for the steel industry was -8.6%, at a relatively low level among industries, exerting a drag on overall PPI. Currently, "hollowing out" competition has led to a decline in steel prices and pressure on corporate profits, triggering a chain reaction of negative feedback. As an important leading indicator of industrial economy, reversing the downward trend of PPI holds significant importance for anti-hollowing out measures, and stabilizing the steel industry's PPI is a key breakthrough point. As of November 11, 2025, the central index of steel prices for the year is around 3,500 yuan per ton, roughly returning to the level of 2017, within a historically low range; the current price is only 3,415 yuan per ton, confirming the industry's weak outlook. Taking into account expectations for a rebound in steel prices in the fourth quarter of 2025, coupled with the support effect of the historical seasonal pattern "Golden September, Silver October" on second-quarter steel prices, the bank predicts that the steel PPI will turn positive year-on-year by the second quarter of 2026 at the latest. As a core indicator reflecting changes in supply and demand in the industrial sector, the process of turning PPI from negative to positive often marks a key turning point in the industrial economy from contraction to recovery, serving as an important window for investment layout. Since 2010, China has experienced two typical cycles of PPI turning positive, with turning points in September 2016 and January 2021 respectively, with the key events for turning positive being supply-side structural reform and the onset of loose liquidity measures by major global economies. During these periods, the steel industry has contributed significantly, with the steel sector showing significant increases. In terms of secondary market performance of the steel sector, in the rising market from 2016 to 2018, the main targets that rose first were mid to small cap steel listed companies, focusing on special steel and raw materials companies; the largest increases were mainly in mid-sized companies with a combination of profit growth and valuation cost-effectiveness, with a significant increase in the proportion of general steel companies in the list of initial rising targets. In the market rise from 2020 to 2021, the first to rise were mid-sized general steel listed companies; the largest increases were in steel listed companies with high performance growth, with a significant portion still in general steel companies. Overall, before and after the two cycles of PPI turning positive, the initial rising targets in the steel sector were mainly in the mid-sized market cap range, and throughout the entire rise, the targets with significant accumulative growth were mainly in the range of good performance growth and cost-effectiveness, with general steel companies as the main targets. It is important to note that while the PPI is currently at a low level, there is considerable room for improvement, and with the support of loose liquidity and improvements in industry supply and demand, the process of sector performance and valuation repair is expected to accelerate. Investment recommendations: Based on the above analysis, the top focus should be on: 1) Regional leading companies with high equipment advancedness and environmental standards such as Hunan Valin Steel, Beijing Shougang, Shandong Iron And Steel, Jiangsu Shagang, Sansteel Minguang, etc.; 2) Companies focusing on integration and restructuring that have excellent growth potential like Baoshan Iron & Steel, Nanjing Iron & Steel, Maanshan Iron & Steel, Xinyu Iron & Steel, Angang Steel, etc.; 3) Specialized steel companies that will benefit fully from the new energy cycle, like CITIC Pacific Special Steel Group, Zhejiang JIULI Hi-tech Metals, Fangda Special Steel Technology, Fushun Special Steel, Jiangsu Changbao Steeltube, Jiang Su Wujin Stainless Steel Pipe Group, Tianjin You Fa Steel Pipe Group Stock, etc.; 4) Upstream raw material supply companies with outstanding competitive advantages like SHOUGANG RES Shandong Jinling Mining, Dazhong Mining, Fangda Carbon New Material, Hbis Resources, etc. Risk factors: Negative impacts from changes in domestic and foreign policies; slowdown or unexpected recovery in domestic and foreign macroeconomies; risk of major safety incidents; uncertainty impacts from geopolitical conflicts; historical data does not represent the future.