The Central Urban Work Conference was held in Beijing from July 14th to 15th. Driven by the overall goal of building a modern people's city that is "innovative, livable, beautiful, resilient, civilized, and intelligent," the renovation of "urban villages and dilapidated houses," and the upgrading of underground pipe networks will significantly enhance expectations for improved demand in the construction and building materials industries. Against this backdrop, black commodities, represented by steel, will significantly benefit.
The Central Urban Work Conference was held in Beijing from July 14th to 15th. The meeting pointed out that China's urbanization is shifting from a period of rapid growth to a period of stable development, and urban development is shifting from a stage of large-scale incremental expansion to a stage primarily focused on improving the quality and efficiency of existing resources. The meeting focused on seven tasks: First, to optimize the modern urban system; second, to build vibrant and innovative cities; third, to build comfortable and convenient livable cities; fourth, to build green and low-carbon beautiful cities; fifth, to build safe and reliable resilient cities; sixth, to build virtuous and benevolent civilized cities; and seventh, to build convenient and efficient smart cities.
From the spirit of this meeting, the direction of the new development model for real estate, "controlling the total amount and improving the quality," has been further clarified. Future urban development will achieve the goal of building comfortable and livable cities through "steadily advancing the renovation of urban villages and dilapidated houses." At the same time, the goal of building "resilient" cities will be achieved through "promoting the construction of urban infrastructure lifeline safety projects and accelerating the upgrading of old pipelines."
Driven by the goal of building a modern people's city that is "innovative, livable, beautiful, resilient, civilized, and intelligent," the renovation of "urban villages and dilapidated houses," and the upgrading of underground pipe networks will significantly enhance expectations for improved demand in the construction and building materials industries. Against this backdrop, black commodities, represented by steel, will significantly benefit.
In the first half of this year, affected by factors such as the Sino-US trade friction, continuous cost reduction, and the weak downward trend in real estate, Steel Prices have generally been in a downward cycle. Taking the Rebar weighted index as an example, its price gradually fell from 3300 yuan/ton at the beginning of the year to around 2900 yuan/ton, a cumulative decrease of nearly 400 yuan/ton, a drop of 12%.
Although steel prices are still in a downward cycle, the rate of price decline has narrowed significantly. As the downward momentum of steel prices gradually weakens, will the steel market be able to usher in a turning point for recovery in the second half of the year? We analyze and sort out from macro and industrial dimensions to find answers for investor reference.
In the first half of this year, China implemented a more proactive fiscal policy and a moderately loose monetary policy.
Key fiscal policy measures include: the issuance of 4.4 trillion yuan in new special bonds by local governments, an increase of 500 billion yuan compared to last year; the issuance of 1.3 trillion yuan in ultra-long-term special government bonds, an increase of 300 billion yuan compared to last year; and the fiscal deficit rate increased from 3% last year to 4%, with the deficit amount increasing by 1.6 trillion yuan compared to last year. In addition, 500 billion yuan in special government bonds will be issued to supplement the capital of the four major state-owned banks.
Key monetary policies include: the central bank lowered the reserve requirement ratio by 0.5 percentage points, providing 1 trillion yuan in long-term liquidity; and the central bank lowered the policy interest rate by 0.1 percentage points, further reducing financing costs and promoting sustained economic recovery.
As domestic macroeconomic policies accelerate their implementation and their effects continue to be released, the momentum of steady economic recovery in China is gradually strengthening. Data released by the central bank shows that in the first five months of this year, social financing demand continued to improve and recover, with the cumulative year-on-year growth rate reaching 8.7%, up 0.7 percentage points from the beginning of the year. From the perspective of the total amount of credit, the overall social financing demand shows a significant improvement and recovery trend. From the perspective of the structure of credit demand, government leverage has increased, and financing demand has been relatively active; while the corporate and household sectors are still in the deleveraging stage, with weaker financing demand. Generally speaking, financing demand is usually a leading indicator of physical demand. As overall social financing demand continues to improve, expectations for improved steel demand also continue to strengthen, and the support for steel prices also strengthens.
In the first half of the year, the issuance of ultra-long-term special government bonds and local government special bonds accelerated, "two new" and "two heavy" projects continued to advance, the momentum of manufacturing recovery strengthened, and infrastructure investment remained at a high level. Data released by the National Bureau of Statistics shows that in the first five months, China's cumulative fixed asset investment growth rate was 3.7%, up 0.5 percentage points from the end of last year. Among them, manufacturing investment and infrastructure investment grew significantly, with year-on-year growth rates of 8.5% and 10.42%, respectively. As the main downstream industries for steel, the continued high growth of manufacturing and infrastructure investment has become the main force driving domestic steel demand. According to calculations by Shanghai Steel Union, manufacturing currently accounts for 46% of China's steel demand, and infrastructure accounts for 18%, with a combined share of 64%. Therefore, under the continuous promotion of macroeconomic policies, with the continuous strengthening of the endogenous driving force of manufacturing recovery and the continued high-speed growth of infrastructure investment, the overall expectation of improved steel demand remains strong.
In contrast, the real estate industry has continued its downward cyclical trend over the past four years. Data from the National Bureau of Statistics shows that real estate investment in the first five months fell by 10.7% year-on-year, and the area of new starts fell by 22.8% year-on-year. Judging from the data performance in the first half of the year, real estate remains the main downstream industry dragging down steel demand. According to research and statistics from Shanghai Steel Union, the real estate industry's share of steel demand has gradually decreased to 25%. As real estate investment and the area of new starts continue to decline, its share of steel demand also continues to decline, and its drag on steel demand gradually decreases. From the data, the monthly average of new real estate starts in the second half of 2024 has fallen to a low of 59.78 million square meters. The monthly average area of new starts in the first five months of this year was 46.37 million square meters. As the base of new starts continues to shrink and decline, the year-on-year decline in the area of new starts in the second half of the year is expected to further narrow. Against this backdrop, we expect the year-on-year decline in the area of new starts in the second half of the year to narrow to within 15%, and the drag of real estate on rebar demand is expected to further weaken.
In the first half of the year, although the global economy has been increasingly affected by the trade war, and many countries have imposed anti-dumping measures on some of China's steel products, China's steel exports have still maintained high growth, showing strong resilience. There are three reasons behind this phenomenon: First, China's steel production capacity accounts for nearly 60% of the global market, and the global market's dependence on China's steel products is high. Second, China's steel supply costs are in the lowest area of the global cost curve, and the cost advantage of steel exports is significant. Third, China's steel export destinations are relatively diverse. Asia, Africa, and Central and South America account for more than 90% of China's steel exports. Countries participating in the Belt and Road Initiative are major export destinations for China's steel.
Currently, there are significant differences in steel prices in the international market. Steel prices in Europe and the United States are at a high global level, while steel prices in Asia are at a global "low point." Taking Hot-rolled Coil Prices For example, the current US import (CFR) price is around US$820 per ton, and the EU hot-rolled coil price is US$680 per ton. In Asia, the import (CFR) price of Vietnamese hot-rolled coil is US$455 per ton, and the export price of Chinese hot-rolled coil is US$445 per ton. This shows that China has a significant price advantage in steel exports, and this advantage is expected to continue in the future.
At the same time, benefiting from the rapid growth of infrastructure construction in countries participating in the Belt and Road Initiative, China's steel exports have maintained a sustained growth trend despite increasing pressure from trade wars and anti-dumping measures. Sustained overseas demand has become a major force supporting China's steel demand. Currently, the proportion of steel exports in China's total steel supply has exceeded 10%.
Data from the General Administration of Customs shows that from January to May this year, China exported a total of 48.47 million tons of steel, an increase of 3.82 million tons year-on-year, representing an increase of 8.6%. The main destinations for China's steel exports are concentrated in Asia and Africa, and most of the export countries are developing countries with relatively fast economic development and broad prospects for infrastructure investment. Although the global trade environment currently faces considerable uncertainty, the foundation for China's steel exports remains relatively solid, and it is expected that steel exports will remain high in the second half of the year.
Based on the above analysis, we make the following assumptions about steel demand in 2025: (1) Manufacturing investment growth remains at 8.5%; (2) Real estate starts decline by 15% year-on-year; (3) Infrastructure investment growth is 5.5%; (4) Steel exports grow by 8%. Based on the above analysis and outlook for the growth rate of the main downstream industries of steel, combined with the proportion of each industry in steel demand, we expect steel demand to maintain a growth trend in the second half of this year, with an estimated annual growth rate of 2%.
Profits Continue to Rise, Supply Constraints Strengthen
In the first half of this year, upstream raw material prices continued to fall, and under the condition that steel product prices also fell, steel mills' production profits gradually improved, significantly better than the same period last year. According to data released by the National Bureau of Statistics: From January to May, the cumulative profit of the ferrous metal rolling industry reached 31.69 billion yuan, an increase of 44.41 billion yuan year-on-year, which clearly shows the improvement in the production and operation of steel mills.
According to Shanghai Steel Union's survey of 247 steel mills nationwide, the profitability of steel mills has shown a continuous upward trend. As of now, the profitability of steel mills has reached 59.3%, an increase of 7.4 percentage points year-on-year, the best performance in nearly three years.
In the first half of the year, under the environment of continuously strengthened domestic macroeconomic policies and the gradual release of policy effects, coupled with the loose supply of upstream raw materials and the continued growth of overseas demand, overall steel demand maintained strong resilience, and steel mill profits gradually rose. In the second half of the year, it is expected that the above influencing factors will most likely continue to exist, and the state of continuous improvement in steel mill profits will continue.
Over the past three years, in the face of a continuous downward trend in domestic steel demand, the China Iron and Steel Association proposed that the steel industry should adhere to the operating principle of "three certainties and three no's." The so-called "three certainties and three no's" principle is: adhere to production based on sales, do not turn cash into inventory; adhere to production based on efficiency, do not cause operational "blood loss"; adhere to sales based on current conditions, do not turn cash into receivables. With the continuous publicity and guidance of the China Iron and Steel Association, and the test of industry pressure over the past few years, the self-discipline awareness of domestic steel mills has significantly improved compared to the past.
Although the production and operation of the steel industry this year has improved compared to the previous two years, and the self-discipline awareness of steel mills has continued to improve, the release of steel mill capacity has not significantly increased. According to data released by the National Bureau of Statistics, from January to May this year, the cumulative domestic crude steel output was 432 million tons, a decrease of 6.98 million tons year-on-year, a decrease of 1.6%. From January to May, domestic Pig iron The cumulative output was 363 million tons, an increase of 1.61 million tons year-on-year, an increase of 0.4%. From the data performance, the domestic crude steel and pig iron output generally remained relatively stable.
In the second half of the year, as the domestic governance of "low-price and disorderly competition" and the policy direction of "orderly withdrawal of backward production capacity" become increasingly clear, the expectation of steel industry capacity control continues to strengthen. Under this policy environment, although the steel industry has entered a stage of continuous improvement in profits, capacity constraints are expected to gradually strengthen, and the pressure of crude steel supply will continue to be released. However, considering the low base of crude steel production in the second half of last year, there is still some room for growth in crude steel production in the second half of this year.
Based on the above analysis and the performance of crude steel supply and demand in the first half of the year, we make the following analysis and judgment on the crude steel supply and demand situation in 2025: Domestic demand growth of 2%, crude steel supply growth of 1.5%, export growth of 5%, and the annual crude steel supply and demand gap is expected to reach 5 million tons, with supply and demand in a tight balance.
Looking forward to the second half of the year, under the effect of the improvement of both supply and demand, the steel industry is expected to continue the state of continuous improvement in profits in the first half of the year, and at the same time, steel prices are expected to usher in a relatively strong and sustained recovery and upward trend.
