Moderate recovery in demand, low profit situation of steel mills difficult to change

In 2023, domestic steel supply and demand are basically balanced, the market is running relatively smoothly, the price volatility rate is significantly reduced, and the structural differentiation characteristics are obvious. Domestic demand, affected by the real estate downturn, building materials consumption is weak, plate and strip supply and demand double increase, iron flow to the surface of the material,strip steelOutstanding performance. In terms of external demand, the weight of exports affecting the domestic supply and demand structure has increased significantly. Compared with the international market, the domestic market has lower costs and obvious competitive advantages.

In stages, from January to mid-March 2023, the post-epidemic squeeze demand release is expected to be strong, driven by factors such as infrastructure, exports and active real estate sales, demand is pulsed growth, and current prices resonate upward; mid-March to late May, the Credit Suisse incident led to increased risk concerns in overseas markets, high domestic production and insufficient demand,steel priceHigh down, in stock link into the active inventory stage; June to late October, domesticsteel marketIn the off-season, steel prices are expected to oscillate widely against the backdrop of high exports; since late October 2023, macro expectations have improved to boost demand and steel prices have started a rebound trend.

Pay Attention to the Construction of "Three Major Projects"

The Central Economic Work Conference in December 2023 released positive policy signals. The main line of proactive fiscal policy in 2024 is relatively clear. The domestic economy is "stable". A number of policies support steel consumption. Steel supply and demand are expected to maintain a balance. It is estimated that the annual crude steel consumption will be 0.959 billion tons, an increase of about 2%.

The real estate industry is still facing certain pressures and challenges in 2024. After the completion peak, the growth rate of the total construction area decreased, the scale of land transactions shrank, the existing inventory is high, the enterprise capital pressure and other factors continue to drag down the new construction of enterprises. New construction is expected to drop by about 10% in 2024, and the sales area of commercial housing nationwide will drop by about 5%.

Policy needs to pay attention to the construction of the "three major projects. The "three major projects" focus on the long-term healthy operation and stable growth of real estate, and try to solve the problems of structure, mismatch between supply and demand, and demand fault. In essence, the "three major projects" of the housing construction system are more inclined to supply-side reforms to match demand and combine with the expansion of domestic real estate demand. This is an important direction of the incremental policy in 2024, especially the transformation of villages in mega-cities will play a positive role in expanding effective investment and promoting demand release.

Infrastructure to maintain strong toughness

From January to November 2023, national fixed asset investment increased by 2.9 percent year-on-year, of which infrastructure investment increased by 5.8 percent year-on-year, lower than expected at the beginning of the year, and the third quarter was constrained by funds, the growth rate of infrastructure investment declined, and the conversion of physical workload slowed down. First, the amount of special debt in 2023 is slightly lower than that of the previous year, and financial support has weakened; second, the pressure on local government debt has increased, and fiscal expenditure has tilted to the field of people's livelihood, squeezing the space for infrastructure expenditure; third, the base is higher in 2022.

Therefore, the additional issuance of 1 trillion yuan of government bonds has formed a strong support for infrastructure funds, which is expected to promote the growth rate of infrastructure investment in 2024 and ease the greater cash flow pressure on central enterprises. As the central government's leverage is included in the central government's fiscal deficit, it will reduce the pressure on local governments, and at the same time, as a special national debt management, to protect the use of funds, * will eventually play a role in stabilizing market expectations and stabilizing aggregate demand.

In terms of projects, the National Development and Reform Commission recently stated that the post-disaster reconstruction projects in the Beijing-Tianjin-Hebei region and Northeast China have continued to advance, driving investment in the infrastructure industry to maintain rapid growth. The State-owned Assets Supervision and Administration Commission stated that it will uphold long-termism, lay out a number of major projects with strong traction and long-term benefits, accelerate the construction of a modern industrial system, and better play the strategic supporting role of the state-owned economy.

Major projects are expected to continue in 2024, but infrastructure investment will be dragged down by land fiscal pressures and accelerated localized debt. On the one hand, the downturn in the real estate market has led to a continuous negative increase in local government land transfer revenue, restricting financial support for infrastructure; on the other hand, with the acceleration of a new round of localized debt, the proportion of urban investment bonds used for project construction will continue to decline, weakening the support for infrastructure. In short, infrastructure is expected to maintain a certain degree of resilience in 2024, the pace of high and low, the annual investment growth rate of about 8%.

Manufacturing continues to repair

Manufacturing investment growth in January-November 2023 was up 6.3 percent year-on-year and is expected to grow at about 6.5 percent for the year (down from 9.1 percent in 2022). Since the "14th Five-Year Plan", manufacturing investment has maintained high growth, and the growth rate has continued to be higher than the growth rate of fixed asset investment and nominal GDP. The main reason is that policies such as tax rebates and fiscal discounts have increased support for investment in manufacturing enterprises, and the second is the promotion of industrial policies related to economic transformation such as new energy to manufacturing investment.

Since peaking in mid -2021, the growth rate of China's building materials exports has entered a downward channel, mainly due to the drag on manufacturing investment from falling external demand and price factors. Exports fell in 2023, partly because the Fed's continued interest rate hikes led to a decline in the price of dollar-denominated export commodities, and on the other hand because of the Russian-Ukrainian conflict, the fading impact of the epidemic, and falling commodity prices, which affected overall export data. In 2024, the RMB will be in the appreciation channel, and related industries may enter the replenishment cycle, which will form some support for the manufacturing industry. It is expected that manufacturing investment will continue to recover, with a full-year growth rate of about 7%.

From a policy perspective, in the process of transformation and upgrading, strategic emerging industries such as high-end manufacturing, intelligent manufacturing, and green transformation have long-term investment potential. From "promoting a new type of industrialization, speeding up the construction of a manufacturing power", "increasing investment support for the manufacturing industry", and the Central Economic work Conference taking "leading the construction of a modern industrial system with scientific and technological innovation" as the key work in 2024, we can see that for a long time in the future, China's policy support for the transformation and upgrading of the manufacturing industry will increase unabated.

Steel exports or high fall

From January to November 2023, crude steel exports totaled 91.81 million tons, up 24.84 million tons or 37% year-on-year. In 2023, China's steel exports accounted for a significant increase in the share of global exports. From the performance of various countries, India's supply and demand double increase, the current total inventory is at a low level; EU steel mills profits are relatively poor, steel mills cut production; Japan and South Korea crude steel production did not increase significantly; Southeast Asian steel mills are shrinking trend, but in 2024 Southeast Asia regional capacity expansion plans, may bring some pressure to the Asian market. Compared with the international market, the domestic market cost is low, and the steel price in 2023 has always maintained a clear international competitive advantage.

From the hot roll export profit situation, most of the time normal trade exports have a certain profit, if it is to pay the export, the profit will be higher. Regionally, exports in the central and southern regions have increased significantly. The crude steel balance sheet shows that China's crude steel exports were about 0.101 billion tons in 2023, up 37.5 percent from 2022. Crude steel exports are expected to be about 90 million tons in 2024, down about 10% from 2023.

Small increase in supply

After the supply-side reform, the concentration of the steel industry has increased, and the production enterprises have a strong production adjustment capacity. Crude steel production increased significantly in 2023 compared to 2022. According to the National Bureau of Statistics, crude steel production in January-November 2023 was 0.952 billion tons, an increase of 1.5 percent over the same period in 2022;pig ironProduction is 0.81 billion tons, an increase of 1.8 over 2022. Since 2023, the output data of the five major materials of the Steel Union and the crude steel output data of the National Bureau of Statistics are quite different, and the proportion of the five major materials in crude steel is also on a downward trend, mainly due to the flow of molten iron to the surface material. The differentiation of the flow of iron and water makes the contradiction between supply and demand of single varieties not effectively accumulated, so the logic of negative feedback on the raw material side by suppressing the material under low inventory is not sufficient.

In 2024, crude steel production is expected to increase by 10 million tons to 1.039 billion tons (2.85 million tons per day); pig iron production is about 0.884 billion tons, molten iron production is 2.42 million tons per day, and year-end inventory will increase by 1.91 million tons, an increase of 4.8.

steel scrapTight supply conditions will ease

Structurally, the iron-steel ratio remained high in 2023, with scrap steel production (NBS caliber) down 0.6 percent from 2022. Pressed by low profits, the proportion of scrap steel into the furnace is difficult to increase, resulting in a decline in economy. Relevant data show that 0.175 billion tons of scrap steel arrived in January-November 2023, up 14% year-on-year.

In 2024, scrap supply continued to grow, according to the self-test model, self-produced scrap increased by 440000 tons, depreciated scrap increased by 1.39 million tons, processed scrap increased by 920000 tons, the total supply increased by 2.75 million tons, taking into account the green low-carbon development trend, scrap steel production still has room for improvement.

In summary, in 2024 steel domestic demand is difficult to have a significant increase, structural differentiation characteristics still exist, supply or a small increase, the overall market-oriented operation is still the main. Low-profit structure and weak recovery in demand are difficult to drive steel mills and trading enterprises to actively replenish their inventories, inventories of all calibers will remain at a neutral low level, and insufficient speculative demand will continue to suppress price volatility. Expected 2024Threaded steel priceThe center is 3900 yuan/ton, the supply of raw materials in the first half of the year is tight, the price is relatively strong, and the steel mill maintains a low profit state. (Author Unit: Hongyuan Futures)