Steel: Looking for the Industry "New King"

As a raw material industry, homogeneity of steel products is its main feature. To select high-quality companies in the industry, the key to enterprise competitiveness lies in the cost control of each link and the control of the three expenses. At the same time, taking into account the downward movement of iron ore prices in the future, the advantages of resource-based companies will decline. Therefore, in the long run, only the most efficient companies will be the future “new kings” of the industry.

The Nature of the Earnings of the Crown Prince's Talent Steel Enterprises

The increase in profits of the steel industry is based on the increase in the marginal cost of smelting processing. Capacity utilization is the main indicator for monitoring the industry's prosperity. In the process of rising operating rates, the marginal cost has gradually increased, and the profit per ton of steel processing has gradually increased. But why did the rate of operating in 2011 reach a fairly high level, but did it bring about a rebound in the earnings of listed steel companies?

Since most of the listed companies belong to state-owned steel companies, they are disadvantaged in all aspects of operational efficiency compared with private steel companies. Therefore, as a limitation of the investment target, it led to the deviation of the market understanding of the industry.

After the disappearance of iron ore barriers, the natural ladder-like smelting cost structure makes the profits of most listed steel companies in high-cost areas grow, and must meet the conditions of close to the limit of operating rate, which is simply the shortage of capacity in the entire industry. Of course, the probability of this happening in a mature manufacturing industry is low, and occasional opportunities mainly come from the pulse of demand external shocks. For example, 4 trillion investment in 2009 or a substantial increase in exports in March 2011.

The profits of listed companies are increasing, just like the purchase of train tickets. The supply of tickets for most of the year is sufficient. However, there is an opportunity for pulse demand to increase during the Spring Festival, which constitutes a periodical shortage.

The external environment before the throne

The surplus in production does not mean that all companies in the industry are operating at low profit margins. On the contrary, due to the coexistence of two sets of market and administrative resource allocation systems, there is a huge gap between the operating efficiency of state-owned steel enterprises and private steel enterprises, and the conditions for obtaining raw materials are basically the same. With the advantage of operational efficiency, the civil steel enterprises have obtained higher profits in the past two years, and have also become the main force of the new round of capacity expansion. In the next two years, most of the production will be mainly strip steel and construction steel.

For production capacity in 2012, we can examine each other in a combination of two ways. One of the steel industry investment cycle is a span of two years, based on the amount of investment per ton of steel (consider the level of fixed asset prices and technological transformation and other factors caused by the increase in the amount of investment in tons of steel) from top to bottom estimates, in 2012 the new production capacity is estimated at 48.53 million Ton.

At the same time, we have summarized the data of domestic blast furnaces from the bottom up, and we have concluded that the steel production capacity was about 816 million tons at the end of 2011, and the new capacity was about 48.16 million tons in 2012, while the capacity under construction and planning is still 2.5 Billion tons or more.

Considering the situation of obsolete production capacity being eliminated, we believe that the steel production capacity will reach approximately 846 million tons in 2012, with a relatively large net increase of approximately 36 million tons in 2011.

From the demand point of view, we combined these three scenarios to predict the total crude steel demand in 2012.

Scenario 1: If, in 2012, China gradually realizes economic restructuring and changes its development mode, and GDP grows at an average annual growth rate of 8%-9%, the total crude steel demand in 2012 is forecast to be 696 million tons, with an annual growth rate of 5.9. %;

Scenario 2: If you maintain the current development model, GDP growth rate of 9% -10% or more, the crude steel demand can reach 709 million tons, an annual growth rate of 7.9%;

Scenario 3: If economic structure adjustments and changes in the way of development are to be achieved in line with expectations, GDP growth rate will be 7%-8%, then crude steel demand will be about 683 million tons, with an annual growth rate of 4.0%.

Drawing on the forecast results of downstream industries of Qilu Securities, our neutral assumptions forecast that domestic demand for steel will reach 696 million tons in 2012, a year-on-year increase of 5.7%. Regarding exports, our judgment is that the overall situation in 2012 is weaker than in 2011. One of the main reasons is that the external economy has slowed down, and on the other hand, the coking coal price gap of export competitiveness of domestic steel products in 2011 gradually converges. More and more challenges have arisen in areas such as Russia and other eastern European regions. Considering both the total amount and the share, we judge that the net export volume of domestic steel products in 2012 was about 25 million tons, a decrease of about 22.8% year-on-year.

Taking into account changes in internal and external demand, we believe that steel production in 2012 will be approximately 721 million tons, an increase of approximately 29 million tons from 2011, a year-on-year increase of 4.2%.

We link the steel industry's production capacity and demand forecast results. In 2012, there was a low possibility of overall capacity shortage in the steel industry. The surplus of smelting production capacity was 125 million tons, equivalent to a utilization rate of about 85.2%, down by 0.3% from 2011. The marginal cost of smelting and processing is reduced. The overall profitability of the companies in the industry is expected to decline slightly.

Waiting for the new king to reign

Cost control technology innovation is king

As China's steel industry has entered a period of maturity, with fierce price competition and a gradual decline in growth, the only way to achieve a profitable return is to develop diversified products or to find ways to reduce costs. When the industry's supply and demand environment deteriorates, fixed costs become a burden for companies to survive. Among homogenized products, only the most efficient producers are likely to continue to make profits during the period of economic growth slowdown.

The domestic steel industry has developed rapidly over the past decade. Although there are occasional breakthroughs in high-end steel, the characteristics of the large-scale production of the raw material industry have determined that most steel mills prefer to compete on steels with the largest capacity in the market. Under the condition that the prices of finished products and raw materials are basically unified, the core competitiveness of iron and steel enterprises mainly comes from cost control on smelting and processing. The industry's future competition will gradually shift to the smelting chain efficiency disputes, and identify the advantages and disadvantages of each company's smelting process, which is an important condition for selecting the king from among them.

The processing fee of iron and steel enterprises mainly includes two aspects. On the one hand, it is the cost control level of the production process link; on the other hand, it is the cost of the enterprise during the period.

Combining the differences in process cost and cost control areas, due to the floating effect created by the two different resource allocation methods of the market and the administration, the final result has verified that private steel enterprises and state-owned units have better cost control capabilities. In the state where demand does not change dramatically, such a cost gap constitutes the profit margin of these enterprises.

At present, most of the steel demand in China is still concentrated on traditional spiral products and hot-rolled coils and other bulk products. Combined with the scaled production characteristics of iron and steel enterprises, steel companies with leading operating efficiency deserve attention in the medium and long term, even if the real economy With shrinking, steel companies at the bottom of the cost curve can still maintain their profitability.

The ability of technological innovation and the proportion of products are the factors for the growth of corporate profits: technological innovation in the subdivided areas can create a staged shortage of certain products. Technical barriers can block the pace of new market entrants in a certain period of time. In this area, companies can get rid of the fierce competition on the cost side and obtain excess profits.

For listed companies, the elasticity of profit growth also needs to meet the high proportion of the product in the company's products, because even if the monomer profit is high, if there is no amount of cooperation, it is difficult to provide effective support for performance.

Investment Strategy:

Improved cost control and partial product shortage

Under the conclusion of capacity utilization decline in 2012, we are more optimistic about the steel enterprises whose cost control continues to strengthen in the medium and long term. This of course needs to satisfy two conditions. On the one hand, subjective or objectively, it has the power to improve efficiency; on the other hand, it has a compressed space for processing fees.

Such as Nanjing Iron & Steel Co., Ltd., under the advantage of the private system, external market pressure will force the company to further increase the cost of processing and raw materials. In addition, in the aspect of improvement in the management of state-owned enterprises, in 2011, Valin Steel has improved, and from the high-cost zone to the middle of the cost range, it has brought about a rebound in profits. Its 2012 performance is also worthy of attention.

The criteria for the judgment of shortage products are that the production enterprises in the industry can conduct downstream cost pressures and gain higher returns. Among the listed companies with special steel business, in addition to Daye Special Steel, the profitability of the special steel business of domestic steel companies is relatively mediocre, and even some steel companies have suffered losses.

Therefore, we do not recognize the logic of the market for special steel companies. The domestic special steel industry, like Shanghai Pudong Steel, is a dual market where both shortage and competition coexist. There is ample capacity in the low-end sector and the core competitive advantage lies in cost control. The high-end market has caused insufficient supply due to technical barriers. We divide the company's product positioning into three major types:

The first category is special steel enterprise groups with high-end, high-end special steels and special alloys (including high temperature, corrosion resistance, and precision) for product positioning; the second category is medium- and low-alloy steel products with a wide range of product positioning. (Special steels such as bearing steels, gear steels, spring steels, etc.) are the main steel companies; the third type is steel mills that mainly produce high-quality bonded steel and carbon steel products.

Due to the advantage of special steel in the rear process, heat treatment, on-line inspection, finishing, flaw detection and packaging are the key to maintaining the organizational performance and stability of steel used in manufacturing, and online control technology is also more complicated. China's special steel production equipment and industrial technology upgrades are not synchronized. On-line process technology lags behind the development of production equipment. It is difficult to stably produce high-quality special steel products and reach the advanced level required for the entire production line. This affects the technological transformation of enterprises. The actual effect.

Therefore, we do not recommend special steel companies currently listed. Under the intersection of shortage products and large production ratios, we are more optimistic about high-temperature alloy products and production companies with more adequate technological reserves such as Gangyan Gona.