Steel Industry: Continuing Improvement in Supply and Demand Relationships in the Second Half of the Year

In the first half of 2011, the demand for steel products at home and abroad maintained a relatively high growth rate, which provided support for the valuation and repair of steel plates. This year's steel supply and demand relationship continues to improve. The current relative valuation is close to the historical average, and the industry has investment opportunities in the second half of the year. However, the current Chinese economy is in a controlled downward cycle. Emerging economies and the euro zone have switched to raising interest rates and resisting inflation. In the short term, the demand for steel products at home and abroad is restrained and the catalyst has yet to come. Ping An predicts that the domestic policy in the second half of the year may "be tight and steady." As the macroeconomic acceleration can enhance the expectations of steel supply and demand improvement. The steel sector may use this as a catalyst to usher in investment opportunities in the second half of the year.

The price of iron ore assets is affected by the iron ore price, and the short-term correction, long-term pessimism, oversold opportunities.

At present, the domestic and international macroeconomic growth has slowed down, and short-term iron ore prices will continue to decline. In the long run, since iron ore prices are still equivalent to high levels before the international economic crisis, supply will be more dynamic than demand, and there may be a turning point in supply and demand in the future. However, major international miners also have incentives to adjust production and price protection.

It is the Chinese overseas equity mines that are really motivated to expand production and drive down prices. The speed of its expansion has great uncertainty, so we are not pessimistic about long-term prices.

In addition to industry and economic fundamentals, the promotion of the international board may also affect the valuation of the sector. With the international board approaching, the domestic capital market will gradually be affected by the overseas valuation system. We believe that the valuation of current A-share steel assets is equivalent to that of overseas, while the valuation of iron ore is high. At the same time, we believe that the convergence of valuations will be a long-term process and that the short-term impact will not be obvious.

In summary, we believe that the supply and demand of the steel industry have improved this year, the current relative valuation is close to the historical average, and there are investment opportunities in the second half of the year. However, the current macroeconomic policy is tight, it is recommended to select “low-estimate” stocks based on PE and PB to “defensive configuration”, including: Baosteel (600019), Xinxing Duct (000778), Daye Special Steel (000708). If there is an inflection point in the second half of the year, the degree of supply and demand improvement may increase.

It is suggested that the stocks with lower tonnage valuation levels be selected as “offensive configuration”. In addition, it is recommended to focus on asset restructuring subject shares: Shagang (002075), Shougang (000959), Hebei Iron and Steel (000709), Fushun Special Steel (600399). Iron ore related stocks, we believe that the better subject is the relatively optimistic expectations of Panzhihua Steel Vanadium and Titanium (000629).