Can interest rate cuts help the steel industry to be “not dimmed?”

The first interest rate cut in more than three years has demonstrated the determination of the central government to grow steadily, releasing positive signals to the market and increasing economic growth expectations. Can this leave the “difficult” steel industry out of the shadow of losses? The industry believes that the interest rate cut will help boost the steel industry out of the dilemma, or benefit the steel market price. However, at the stage of serious overcapacity in the industry, steel supply is much higher than market demand, and it will be difficult to ease this supply and demand pressure in the short term. "Poor off-season" is less likely.

Industry urgently awaits demand recovery

This rate cut is one of the important measures for steady growth, and it is crucial to boost economic growth. At the same time, it also brought a sense of "long drought and raining" to some industries. Cutting interest rates will have a substantial effect on high-debt ratio industries, such as the real estate industry. The lowering of the benchmark interest rate will help reduce the interest expenses of homebuyers, thereby stimulating demand for home purchases, and it will also help reduce real estate developers’ financial costs and ease financial pressure.

For the steel industry, the effect is not very direct. Some people in the industry believe that although interest rate cuts will be positive for commodity markets including steel products, it is difficult for a rate cut to play a substantive role and the psychological effect is relatively greater. "For the iron and steel industry in the midst of deep water, it is more urgent to let demand be released as soon as possible." Some analysts said.

In this regard, GF Securities analyst Feng Gangyong believes that the country has recently accelerated the approval of key housing projects such as housing, highways, and airports. The acceleration of investment will effectively stimulate demand for steel products. "But the transmission of demand will still take some time. The short-term substantive assistance to the steel market is limited," said Feng Gangyong.

“After the steady growth signal was issued, the market mentality was quickly restored from the pessimistic attitude of the previous period, and promoted the downstream purchases and intermediate demand stabilization.” Qi Hui Securities analyst Yan Hui also said that because it is not expected to quickly cash in a short period of time, the industry chain After a period of restocking, it will wait for the confirmation of the fundamentals again, and the driving force for the start-up rate will be limited, and the profits of the steel enterprises will remain low.

BOC International believes that the introduction of a series of favorable policies will help the recovery of steel market demand and boost confidence. "But overall, the steel market is still weak overall. On the one hand, the growth rate of investment in fixed assets is decelerating, the growth rate of the downstream industry is slowing down, and the demand for the steel market is reduced. At the same time, the high-temperature rainy weather is approaching, and some downstream industries, such as automobiles, etc. It will also enter the off-season demand; on the other hand, the rapid increase in steel production will lead to an increase in market supply pressure, and the loosening of costs will also make the cost of steel prices less supportive."

Unbalance between supply and demand leads to industry's severe winter

As an important basic industry for the national economy, the steel industry fell into a dilemma for the first time in the first quarter of the new century because of the loss of the entire industry. This kind of loss situation has not been fundamentally improved in April and May. This is undoubtedly for the steel industry. Cast a long shadow.

In fact, starting from the fourth quarter of 2011, the steel industry's main business has begun to lose money, and after entering 2012, it is still falling into the industry-wide losses. According to the statistics of the China Iron and Steel Association, the accumulated profits of key large and medium-sized steel enterprises from January to April were only 1.15 billion yuan, a decrease of 33.1 billion yuan, a decrease of 96.7%; losses of loss-making enterprises were 10.4 billion yuan, and the loss reached 33.8%.

“In the first two months of this year, key large and medium-sized steel companies once suffered a loss in the entire industry and did not gradually turn to a meager profit situation until March. However, in May, the accelerated decline in steel prices has caused steel companies to regain operating difficulties. It may be possible from June. There will be a loss-making situation in the entire industry," said analysts.

The rapid decline in demand was regarded by the industry as the primary reason for the plight of the steel industry. Standard & Poor's Rating Service said in its latest report released on June 7 that it is expected that steel demand in China will increase by 4% to 6% in 2012, while steel demand will increase by an average of 10.7% between 2007 and 2011. “Weak demand in the real estate industry and slowdown in infrastructure construction have led to a decline in the growth rate of the steel industry. In the short term, the higher demand from the auto industry and infrastructure construction in western China is not enough to offset the decline in overall demand,” the report said.

In the long run, overcapacity in China's steel industry is an important cause of loss in the entire industry. In response, Li Zhongjuan, deputy director of the Industrial Coordination Department of the National Development and Reform Commission, said that the current steel industry has a total surplus of production and excessive production pressure. According to the investigation of the current state of steel production capacity in the country, among the 357 million tons of production capacity started since 2005, 79% of the production capacity that has not been approved by the state has been obtained, and irregularities are very common.

People in the industry believe that the investment in the steel industry in the past few years has been excessive and the current production capacity has been released. This is particularly evident in the face of weak demand. “In June, the daily output of crude steel may be maintained at a record level of 2 million tons, because China’s steel industry has huge production capacity and any reduction in production is limited.” Some people from the China Iron and Steel Association also expressed similar views.

As for the doubtful earnings, but crude steel production is still running high, many market participants believe that private small and medium-sized iron and steel enterprises have become the main force in China's crude steel production growth. According to a research report, in April, non-steel member companies’ incremental production of crude steel accounted for 60% of the national increase in steel production. The average daily output of crude steel increased to 377,300 tons, an increase of 2.178 million tons from the lowest point of last year. The increase was 136.55%, accounting for 18.62% of the national output, which was 9.03% higher than the November low. In contrast, the average daily output of crude steel of the steel association member companies only increased by 145,000 tons compared with November last year, an increase of 9.64%.

The future trend of steel stocks is hardly optimistic

In the situation where the stock market has continued to slump, the "breaking net tide" has surged. As of June 7th, the “broken net” team has expanded to 76, more than double the 37 previous days. Among them, as many as 11 steel stocks accounted for more than 14% of the total number of “broken net” stocks and became the “first group army”. As of the close of June 8, the A-share steel sector index also fell for eight consecutive trading days, close to the lowest point since April.

“In terms of relative valuations, the steel sector does not have an advantage.” Some analysts believe that the relative P/E and P/B ratio of the steel sector are 5.30 times that of the overall A-share P/E ratio and the overall P/B ratio. And 0.56 times. The latter is between the average of 0.55 times since the beginning of 2010 and the historical average of 0.58 times since 1995. The overall P/E ratio for the steel sector is 22.6 times, which is higher than the average 2010 PER of 20.4 times. The overall steel price of the steel sector is 1.07 times, which is lower than the average of 1.39 times the PBR since the beginning of 2010. The valuation of the steel sector is relative. High volatility.

Combined with the trend of steel prices, the recent market is difficult to have great results. Everbright Securities analyst Yan Yang analysis said that since May, domestic steel mills have introduced maintenance plans. The increase in overhauls and maintenance of steel mills is one of the prerequisites for the stabilization of the steel market. However, as steel demand is unlikely to reverse the trend of seasonal weakness in the short term, even if the steel mills actively control production, the steel market is unlikely to see a trend increase. BOC International also stated that "the steel price in June is expected to stabilize, but the space for rising and falling will be limited."

"From the perspective of industry fundamentals, China's steel industry is facing the challenges of high raw material prices, high financial costs, and disorderly market competition, coupled with poor resources protection and low concentration in the steel industry in our country. Even if demand recovers in the short term, the overall operating situation of the steel industry will remain relatively long.” Some people in the industry expressed concern about the future trend of the sector.

Standard & Poor's credit analyst Suzanne Smith said: "We expect lower profit margins and higher operating leverage will hurt the profitability of the Chinese steel industry in the next few years. The central government may not be able to respond to this quickly or objectively. Helping the steel industry out of the woods in the next few years will definitely be the case in 2012."