The basic conditions of the domestic steel industry in 2010 were: strong demand, high crude steel production; high costs, oversupply, and low corporate profits. Although experiencing such unfavorable factors as real estate control and “limited production and production restrictionsâ€, the overall operating status of the industry is stable. In the capital market, the overall performance of the steel sector in 2010 was poor. As of December 24, the Shanghai Composite Index fell by about 13% from the beginning of the year, while the steel plate index fell by about 25% over the same period, underperforming the broader market by 12%.
2010: High production and demand growth High crude steel production record high. It is estimated that the total crude steel production in 2010 will be 625 million tons, an increase of about 10% over the same period of last year. In May, the monthly output of steel was the highest. Affected by the expected decline in demand and energy conservation and emission reductions, output fell in the second half of the year. In December, production of most steel companies gradually returned to normal.
Since the beginning of this year, the price of raw materials represented by iron ore has risen sharply. As of December 24, 2010, the price of Qian'an fine iron powder is about 1,400 yuan/ton, which is 50% higher than the beginning of the year.
In 2010, domestic steel production and demand maintained a relatively high growth, but the profits of iron and steel enterprises were meagre. In the first three quarters of 2010, the average sales profit rate of domestic large and medium-sized iron and steel enterprises in the country was only 2.84%. Iron and steel enterprises were in a state of low profit and were the lowest in all industries. Rising costs and overcapacity are the main reasons for the low profitability of steel companies.
The growth of steel demand slows down During the “12th Five-Year Plan†period, China’s economic development structure is facing adjustments. Consumption, investment, and exports will coordinate the economic growth, and the investment will continue to maintain a reasonable growth. Economic transition is a gradual process. Changing the mode of economic development will not be at the cost of abandoning economic growth. Investment in a period of time is still the main driving force for China’s economic growth.
From January to November 2010, the investment in urban fixed assets was 210,698 billion yuan, a year-on-year increase of 24.9%. From the perspective of construction and new construction projects, from January to November, 439758 construction projects have been accumulated, an increase of 10288 compared with the same period of last year; 301937 new projects have been started, a decrease of 15,075 year-on-year. Although the number of newly started projects has decreased compared to the same period of last year, the increase in the number of construction projects will keep the demand for steel products sticky. We are still optimistic about the performance of fixed assets investment in the first year of the “12th Five-Year Plan.†Higher fixed asset investment growth and higher new construction area will drive steel demand. It is expected that the growth rate of fixed asset investment in 2011 will be about 22%. Slightly below the 2010 level.
Real estate investment accounts for about 20% of the total investment in fixed assets. From January to November 2010, real estate development investment was 4,269.7 billion yuan, an increase of 36.5%. Real estate investment will have a greater impact on the demand for construction steel. From the perspective of the completion of real estate development investment, new housing start-up area and purchase of land area, the negative effects of real estate control policies did not lead to a rapid shrinkage of real estate investment, which has exceeded the market's previous pessimistic expectations. The scale of affordable housing construction in 2011 will reach 10 million sets. The construction of affordable housing can replace commercial housing as the investment focus for pulling upstream and downstream, and achieve the economic goal of steady growth.
We use the intensity of steel consumption in GDP to predict the apparent demand for steel in 2011. Using the 1999 price as the constant price to measure the consumption intensity coefficient of crude steel in GDP from 1999 to 2010 in the range of 0.1494-0.2371, the steel consumption intensity coefficient reached the peak in recent years in 2009, and the main driving force for economic growth in 2009. From investment, the proportion of steel use is high. During the “Twelfth Five-Year Plan†period, China's economic structure adjustment expected that the steel consumption intensity index in 2011 will continue to fall. After measuring the GDP intensity of consumption method, we have found that the apparent consumption of crude steel in 2011 was between 5.94 and 7.15 billion tons. We expect the consumption of crude steel in 2011 to be around 650 million tons.
Historically, domestic steel prices are mainly affected by demand, supply, and cost. In 2011, domestic steel demand will continue to maintain a certain growth rate. However, under the condition of excess capacity, the increase in steel prices will be driven more by cost. The average steel price in 2011 is expected to be about 10%-15% higher than that in 2010.
During the “12th Five-Year Plan†of the investment strategy in 2011, the mode of domestic economic growth will gradually change, and economic restructuring will reduce the intensity of consumption of steel by economic growth. The economic transformation is a gradual process. The investment inertia will remain the driving force for growth in steel demand in the domestic market in 2011. It is expected that the apparent demand for domestic crude steel in 2011 will increase by 48 million tons on the basis of 2010 to 650 million tons, which is the same Increase 8-9%. With the implementation of strategic emerging industries, the growth of steel demand will slow down, and it is expected that China's crude steel consumption will show a downward trend towards the end of the “Twelfth Five-year Plan†period.
At present, the domestic steel plate PB level is 1.5 times, which is about 60% discount to the Shanghai and Shenzhen 300PB, which is higher than the historical average discount level. At present, the world's large-scale iron and steel enterprises have a PB valuation of about 1-2.5 times. Although the A-share market has the lowest market rate for the steel sector, we believe the overall valuation is more reasonable. In 2011, the high growth rate of domestic fixed asset investment and the continuous increase in the prosperity of industrial enterprises will effectively stimulate the demand for steel. We expect the industry's profitability to be better than in 2010, but the increase in earnings is largely limited by rising raw material prices. In the medium term, the steel industry with high energy consumption and high pollution during the 12th Five-Year Plan period may face the limit of growth and give the industry a “neutral†rating.
China needs and must adjust its economic structure in order to promote sustainable economic development. Economic restructuring is not an easy task. It is expected that China’s economic growth will continue to be driven by investment in 2011. Infrastructure construction and real estate are still the main areas of steel consumption. In the second quarter of 2011, the steel industry will have structural trading opportunities. It will look to Bayi Iron & Steel, a newly-built cast-iron pipe with regional development advantages; Ordos, Lingang Steel and Shanghai Dayu Special Steel Co., Ltd., which has resource advantages; Li special materials.
2010: High production and demand growth High crude steel production record high. It is estimated that the total crude steel production in 2010 will be 625 million tons, an increase of about 10% over the same period of last year. In May, the monthly output of steel was the highest. Affected by the expected decline in demand and energy conservation and emission reductions, output fell in the second half of the year. In December, production of most steel companies gradually returned to normal.
Since the beginning of this year, the price of raw materials represented by iron ore has risen sharply. As of December 24, 2010, the price of Qian'an fine iron powder is about 1,400 yuan/ton, which is 50% higher than the beginning of the year.
In 2010, domestic steel production and demand maintained a relatively high growth, but the profits of iron and steel enterprises were meagre. In the first three quarters of 2010, the average sales profit rate of domestic large and medium-sized iron and steel enterprises in the country was only 2.84%. Iron and steel enterprises were in a state of low profit and were the lowest in all industries. Rising costs and overcapacity are the main reasons for the low profitability of steel companies.
The growth of steel demand slows down During the “12th Five-Year Plan†period, China’s economic development structure is facing adjustments. Consumption, investment, and exports will coordinate the economic growth, and the investment will continue to maintain a reasonable growth. Economic transition is a gradual process. Changing the mode of economic development will not be at the cost of abandoning economic growth. Investment in a period of time is still the main driving force for China’s economic growth.
From January to November 2010, the investment in urban fixed assets was 210,698 billion yuan, a year-on-year increase of 24.9%. From the perspective of construction and new construction projects, from January to November, 439758 construction projects have been accumulated, an increase of 10288 compared with the same period of last year; 301937 new projects have been started, a decrease of 15,075 year-on-year. Although the number of newly started projects has decreased compared to the same period of last year, the increase in the number of construction projects will keep the demand for steel products sticky. We are still optimistic about the performance of fixed assets investment in the first year of the “12th Five-Year Plan.†Higher fixed asset investment growth and higher new construction area will drive steel demand. It is expected that the growth rate of fixed asset investment in 2011 will be about 22%. Slightly below the 2010 level.
Real estate investment accounts for about 20% of the total investment in fixed assets. From January to November 2010, real estate development investment was 4,269.7 billion yuan, an increase of 36.5%. Real estate investment will have a greater impact on the demand for construction steel. From the perspective of the completion of real estate development investment, new housing start-up area and purchase of land area, the negative effects of real estate control policies did not lead to a rapid shrinkage of real estate investment, which has exceeded the market's previous pessimistic expectations. The scale of affordable housing construction in 2011 will reach 10 million sets. The construction of affordable housing can replace commercial housing as the investment focus for pulling upstream and downstream, and achieve the economic goal of steady growth.
We use the intensity of steel consumption in GDP to predict the apparent demand for steel in 2011. Using the 1999 price as the constant price to measure the consumption intensity coefficient of crude steel in GDP from 1999 to 2010 in the range of 0.1494-0.2371, the steel consumption intensity coefficient reached the peak in recent years in 2009, and the main driving force for economic growth in 2009. From investment, the proportion of steel use is high. During the “Twelfth Five-Year Plan†period, China's economic structure adjustment expected that the steel consumption intensity index in 2011 will continue to fall. After measuring the GDP intensity of consumption method, we have found that the apparent consumption of crude steel in 2011 was between 5.94 and 7.15 billion tons. We expect the consumption of crude steel in 2011 to be around 650 million tons.
Historically, domestic steel prices are mainly affected by demand, supply, and cost. In 2011, domestic steel demand will continue to maintain a certain growth rate. However, under the condition of excess capacity, the increase in steel prices will be driven more by cost. The average steel price in 2011 is expected to be about 10%-15% higher than that in 2010.
During the “12th Five-Year Plan†of the investment strategy in 2011, the mode of domestic economic growth will gradually change, and economic restructuring will reduce the intensity of consumption of steel by economic growth. The economic transformation is a gradual process. The investment inertia will remain the driving force for growth in steel demand in the domestic market in 2011. It is expected that the apparent demand for domestic crude steel in 2011 will increase by 48 million tons on the basis of 2010 to 650 million tons, which is the same Increase 8-9%. With the implementation of strategic emerging industries, the growth of steel demand will slow down, and it is expected that China's crude steel consumption will show a downward trend towards the end of the “Twelfth Five-year Plan†period.
At present, the domestic steel plate PB level is 1.5 times, which is about 60% discount to the Shanghai and Shenzhen 300PB, which is higher than the historical average discount level. At present, the world's large-scale iron and steel enterprises have a PB valuation of about 1-2.5 times. Although the A-share market has the lowest market rate for the steel sector, we believe the overall valuation is more reasonable. In 2011, the high growth rate of domestic fixed asset investment and the continuous increase in the prosperity of industrial enterprises will effectively stimulate the demand for steel. We expect the industry's profitability to be better than in 2010, but the increase in earnings is largely limited by rising raw material prices. In the medium term, the steel industry with high energy consumption and high pollution during the 12th Five-Year Plan period may face the limit of growth and give the industry a “neutral†rating.
China needs and must adjust its economic structure in order to promote sustainable economic development. Economic restructuring is not an easy task. It is expected that China’s economic growth will continue to be driven by investment in 2011. Infrastructure construction and real estate are still the main areas of steel consumption. In the second quarter of 2011, the steel industry will have structural trading opportunities. It will look to Bayi Iron & Steel, a newly-built cast-iron pipe with regional development advantages; Ordos, Lingang Steel and Shanghai Dayu Special Steel Co., Ltd., which has resource advantages; Li special materials.