Market: steel plate fell 5.35% in July 2019, 3.8 percentage points lower than the market

In July 2019, Shanghai Composite Index fell 1.56%; Shenwan iron and steel index fell 5.35%, 3.8 percentage points behind Shanghai Composite Index, only Daye Special steel rose (2.83%). Looking forward to August, the Shenwan iron and steel index has achieved positive relative returns in 9 years since 2000.

Price and profit: steel price rebounds slightly and simulated gross profit is still at a low level

In July 2019, the price of most steel varieties has rebounded; the price of iron ore continues to rise, and the price of coke has fallen. In July 2019, the average gross profit per ton of deformed steel, hot-rolled steel and cold-rolled steel was 209.8 yuan, - 0.20 yuan and - 202.7 yuan, respectively, maintaining a relatively low level.

Supply: at the end of July, the utilization rate of blast furnace capacity decreased significantly under the influence of Tangshan production limit

In July 2019, the average utilization rate of blast furnace capacity was 80.79%, 3.82pct month on month (MOM) down, 0.36pct year-on-year (YoY) down, which was related to Tangshan environmental protection and production restriction policy; the average utilization rate of electric furnace capacity was 68.39%, 0.55pct month on month (MOM) up, and kept high. As of the end of July, the relative premium of high and low-grade mines was 11%, still at a low level.

Demand: the growth of real estate industry slows down

In July 2019, the PMI new order index of steel industry was 45.8%, still below the boom and bust line; the cement price fell by 1.86% in total, and the leading indicators of construction industry and manufacturing industry all performed poorly. Specifically, in June, the growth rate of the real estate industry slowed down, the infrastructure industry was in the bottom rebound cycle, the automobile output was still relatively low, and the household appliance output grew steadily. In addition, the social stock of steel has reached a new high in five years, which also shows that the demand for steel is weak. On the whole, the demand for iron and steel is calm and slightly depressed.

Pay attention to the potential policy impact of the supply side in August, and the industry still needs medium-term logic

In July, Tangshan environmental protection limited production made the utilization ratio of blast furnace capacity drop significantly, supporting the short-term fundamentals. Looking forward to August, we need to pay attention to the continuation of environmental protection and production restriction, as well as the influence of potential ministries and commissions to investigate and punish the illegal and backward production capacity. In the short term, it may inhibit the supply of steel, but it is difficult to fundamentally reverse the supply and demand pattern of the steel industry, which still needs medium-term logic. On the demand side, the uncertainty of "real estate is not speculation" policy and trade friction continues to affect the construction industry and manufacturing industry, and it is expected that the demand is difficult to exceed expectations.

Investment suggestion: the sector has an undervalued advantage in the short term and maintains the rating of "overweight"

From the perspective of the disclosure of the performance forecast of China Daily, the performance of steel plate 2019q2 has significantly improved month on month, and the steel plate has a certain undervalued advantage in the short term. We maintain the steel industry's "overweight" rating. It is suggested to pay attention to the individual stocks with outstanding governance level, low cost advantage and high added value advantage: Benxi steel plate, Daye Special Steel and new steel.

risk analysis

The implementation effect of environmental protection production restriction is lower than expected; the supply of steel is too much; the downstream demand of steel is lower than expected; the production safety of steel enterprises and other risks.

(source: Everbright Securities)