Steel Industry: Beware of Volatility from Cooling Sentiment
Recently, the China Iron and Steel Industry Association released a document titled "Maintaining the Overall Interests of the Industrial Chain and Jointly Resisting "Involutionary" Competition." The article mentions that comprehensively rectifying "involutionary" competition is a systematic project that affects the entire system; it cannot be solved by a single industry alone. The steel and automotive industries need to base themselves on their own realities, build consensus, and work together. Both steel and automotive companies should recognize that industry interests are above company interests, and company interests stem from industry interests. They should accelerate the transition from a "quantity-based" to a "price-based" approach and strengthen the collaborative governance of the upstream and downstream of the industrial chain.
The core contradiction currently facing the steel industry is the intensification of homogeneous competition, leading to falling product prices and an imbalanced market structure. What profound impact will "anti-involution" have on the steel industry? Song Xiangqing, vice president of the China Society of Business Economics, analyzes that in 2015, supply-side structural reforms used administrative measures to eliminate backward production capacity in the steel industry, achieving a re-balance of supply and demand and a significant improvement in profit margins. This round of "anti-involution" emphasizes market mechanisms and industry self-discipline to promote an increase in the proportion of electric arc furnace steelmaking, achieve efficiency upgrades through equipment upgrades and intelligent transformation, and promote technological iteration and green transformation.
Li Mingyu, deputy director of the Xinhu Futures Research Institute, said that the current imbalance in profit distribution in the black industrial chain is prominent, and steel mills' profits are excessively dependent on coal and other raw materials' low-price concessions. However, after three consecutive years of price declines, some coal companies have fallen into losses, and there is limited room for further concessions. At the same time, the lack of the "water storage" function of midstream traders has exacerbated short-term price fluctuations, which is not conducive to the long-term stable development of the industry. Solving "involution" requires focusing on optimizing the demand structure and reconstructing the profit distribution mechanism to promote the transformation of the industry towards high-quality development.
He Jianhui, senior analyst at Guotou Futures, said that in recent years, the black industrial chain has achieved phased results in production capacity control, production reduction, and the exit of backward production capacity. However, due to the fluctuating recovery of terminal demand, the market supply and demand are still mismatched. "If we only rely on market-oriented means, the clearing of production capacity in the black industrial chain will be an extremely long process. To help the market return to normal as soon as possible, policy constraints and guidance are indispensable. Only when supply and demand gradually return to equilibrium can all links in the industrial chain regain vitality, and the market can achieve healthy development." he said.
Regarding the actual driving force of "anti-involution" on the black industrial chain, Li Mingyu believes that currently, "anti-involution" is more of a market sentiment driver, and its impact on the industry's fundamentals is not yet significant. Whether the anti-involution trend can continue depends on whether special documents will be issued for the steel industry in the future.
He Jianhui emphasized that with the central government's setting the tone and industry associations following suit, "anti-involution" has become a key variable in guiding future market trends. Currently, the prices of related black commodities are at a relatively low level, and risks have been largely released, significantly enhancing price elasticity. Supported by expectations of supply-side structural reforms, related commodities still have upward momentum. However, he also cautioned that if there is no significant improvement in terminal demand and a lack of substantial policy measures in the future, there is a need to be wary of the risk of price fluctuations caused by cooling market sentiment.
