Focus on the underestimated core assets in the manufacturing industry. As a cyclical product at the bottom of its prosperity cycle, steel should not be overly pessimistic, especially the core assets of the industry with strong prosperity and good cash flow and dividends at the bottom of the cycle are still underestimated. Currently, the steel plate P/B is 0.8x, and the average ROE is 7%, still in a stage of low valuation and high safety margin. We believe that the leading steel enterprises in the manufacturing industry have medium and long-term investment value. At this point, both profitability and valuation are at the bottom of the cycle, and patience and confidence are equally important. Looking forward to the second half of the year, as domestic demand gradually recovers and steel production is further reduced, the scissors difference between furnace materials and steel will narrow, and the profits of the black industry are expected to be rebalanced. We are optimistic about the gradual repair of the profitability and valuation of core assets. In terms of targets, we suggest focusing on two main lines: (1) Industry demand will continue to differentiate, and manufacturing core assets with strong competitiveness and excellent profitability are expected to further expand their production capacity and competitive advantages in the process of industry clearing. (2) Leading enterprises in special steel and new materials, especially those who benefit from the recovery of manufacturing prosperity and have the certainty of growth in the sub-tracks.

Abstract

The differentiation between the construction and manufacturing industries continues, and the steel supply and demand pattern is expected to improve marginally. We believe that the steel supply and demand pattern in the second half of the year is expected to improve marginally. On the supply side, with the implementation of the Energy Saving and Carbon Reduction Action Plan, the industry's production reduction is expected to be promoted in the second half of the year. We assume that the annual crude steel output will decrease by 1.5% year-on-year, and the calculated 2H crude steel output will be 473 million tons, which needs to be reduced by 9.5% month-on-month in the first half of the year; On the demand side, we expect that the repair of real estate construction and sales will still be slow, but the landing of infrastructure physical work volume is expected to accelerate, and the prosperity of the automotive/mechanical manufacturing industry is expected to be good. We expect that downstream demand in August will welcome a bottom recovery. As the golden nine silver ten season arrives, the supply and demand gap will gradually appear. We calculate that the steel demand for the construction industry in 2H will be 199 million tons (an increase of 4.2% month-on-month and a decrease of 6.1% year-on-year), and the steel demand for the manufacturing industry will be 287 million tons (an increase of 8.4% month-on-month and an increase of 5.4% year-on-year). The total domestic steel demand will be 486 million tons (an increase of 6.7% month-on-month and an increase of 0.4% year-on-year).

The profit distribution of the industry chain will be rebalanced, and we are optimistic about the double repair of the profitability and valuation of core assets. Under the development trend of energy saving and carbon reduction, the Matthew effect of the industry will further highlight, and the importance of the cash flow and profitability of steel enterprises will be more significant. We believe that in the second half of the year, the prices of ore and coke are likely to enter a downward channel, and the profit distribution pattern of the black industry chain may change. Manufacturing core assets with operational resilience and competitive advantages are expected to take the lead in getting out of the "squeeze" of high costs and low demand, and usher in a gentle recovery of profits and revaluation of value. We calculate that the production profit of rebar/cold rolling in 4Q24 (considering one month of raw material inventory) will rise to 100/222 yuan/ton, which is 87/99 yuan/ton more than 2Q24.

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Supply: The reduction of output continues under the background of energy saving and carbon reduction

In 2024, the output control will continue to be implemented. Under the neutral assumption, we expect that the crude steel output in 2024 will decrease by 1.5% year-on-year. On May 29, 2024, the State Council issued the Energy Saving and Carbon Reduction Action Plan for 2024-2025 (hereinafter referred to as the "Plan"), which clearly proposed to continue the control of crude steel output in 2024 and reiterated the strict implementation of capacity replacement, prohibiting the addition of new steel capacity in the name of mechanical processing, casting, ferroalloy, etc., and strictly preventing the resurgence of "ground steel" capacity. Since June, various regions have followed the requirements of the plan and accelerated the implementation of specific execution measures for energy saving and carbon reduction in the steel industry. We believe that the output control in 2024 is a continuation of the industry output reduction policy under the dual carbon background from 2021 to 2022, and combined with carbon emissions and environmental performance, the control is expected to be more accurate and effective. We expect that after the promulgation of the "Plan", the output of various steel enterprises will be lower than the output guidance set at the beginning of the year. Under the optimistic/neutral/pessimistic assumption, we expect that the crude steel output in 2024 will decrease by 2.5%/1.5%/0% year-on-year, respectively.

The pressure of production reduction in 2H24 is still relatively large, and we expect that the situation of oversupply will be improved. From January to June 2024, the crude steel output in China was 531 million tons. Since the beginning of the year, the national crude steel daily output has increased month by month. In May/June, the crude steel single-month output turned positive to an increase of 2.7%/0.2% year-on-year, with a daily output of 3.06/3.07 million tons (the data口径 used to calculate the daily output is the cumulative output subtracted). Combined with our calculation of the annual crude steel output, we expect that under the optimistic/neutral/pessimistic assumption, the crude steel output in 2H24 will be 489/473/463 million tons, a decrease of 7.9%/10.8%/12.7% compared to the first half of the year. The corresponding monthly output in the second half of the year will be 0.78/0.80/0.82 million tons, a decrease of 6.6%/9.5%/11.4% compared to the first half of the year. The pressure of production reduction in the second half of the year is still relatively large, and we expect that the situation of oversupply in the steel market will be improved.

Demand: It is expected to improve month-on-month, with manufacturing being stronger than construction

Liquidity: The liquidity environment in the second half of the year is expected to be more relaxed, and the willingness to consume and invest may be released.**Automobiles:** The production and sales volume of automobiles maintained growth in the first half of the year. In June 2024, the cumulative year-on-year growth rate of automobile production and sales was +5.7% and +6.1%, respectively, with the demand for steel used in automobiles continuing to grow. Looking ahead to the full year, as the domestic demand within the industry gradually stabilizes, coupled with policy benefits such as the trade-in of consumer goods, exports are expected to continue to improve, and the demand for automobiles is likely to further release additional increments. The CICC Automobile and Mobility Equipment Group forecasts that the penetration rate of new energy will continue to increase, with the 3Q-4Q expected to gradually break through at a pace of 45%, 50%, and the automobile insurance volume in 2024 is expected to grow by 4-5% year-on-year. Based on this, we calculate that the steel used for automobiles in 2H24 will be 38 million tons, a quarter-on-quarter increase of 25.4%, and a year-on-year increase of 3.9%; the total steel used for automobiles for the whole year will be 68 million tons, a year-on-year increase of 5.5%.

**Home Appliances:** The subsidy for trading in old home appliances is expected to boost domestic demand. As of June 2024, the cumulative year-on-year growth rate of air conditioner/ household refrigerator/ household washing machine production was +13.8%/ +9.7%/ +6.8%, maintaining a high growth rate. In terms of the overseas market, since 2Q23, the destocking cycle of the home appliance industry in Europe and America has ended, and our country's export orders have continued to recover and grow. In terms of the domestic sales market, around 2010, our country introduced a large-scale home appliance subsidy policy, and major home appliances迎来了 a large-scale sale under the stimulus of the policy. Currently, this batch of appliances is in the replacement period, and the demand for renewal is gradually being released. According to the calculation of the CICC Home Appliance and Smart Home Group, the renewal demand in the domestic sales of refrigerators/ washing machines/ air conditioners accounts for 70%/ 70%/ 50%. The home appliance trade-in subsidy policy issued by the National Development and Reform Commission in July 2024 [7] clearly proposed to give a trade-in subsidy to individual consumers who purchase refrigerators, washing machines, TVs, air conditioners, computers, water heaters, household stoves, range hoods and other 8 types of home appliance products with energy efficiency or water efficiency standards of 2 or above. We believe that this subsidy policy will further boost domestic sales of home appliances, and major home appliance categories with high renewal demand such as air conditioners/ refrigerators are expected to benefit, supporting the domestic demand for steel used in home appliances in the second half of the year. We calculate that the steel used for home appliances in 2H24 will be 11 million tons, a quarter-on-quarter decrease of 7.1%, and a year-on-year increase of 2.7%; the total steel used for home appliances for the whole year will be 22 million tons, a year-on-year increase of 3.0%.

**Machinery:** The demand for steel used in machinery is expected to gradually pick up. In terms of construction machinery, the sales volume of construction machinery is highly related to real estate, and the current real estate prosperity is still weak, with relatively low engineering demand. The CICC Machinery Group believes that the current surplus of construction machinery is still serious, suppressing medium and short-term demand. We calculate that the steel used for construction machinery in 2H24 will be 10 million tons, a quarter-on-quarter decrease of 28.7%, and the total steel used for construction machinery for the whole year will be 23 million tons. Power equipment and other machinery, due to their weak correlation with real estate, we believe that with the acceleration of infrastructure investment and manufacturing investment related to new quality production force direction, the demand for steel is expected to continue to improve. We comprehensively calculate that the total steel used for machinery in 2H24 will be 95 million tons, a quarter-on-quarter increase of 4.3%, and the total steel used for machinery for the whole year will be 185 million tons.

**Exports:** The price advantage is expected to be maintained, supporting the stable growth of steel exports in the second half of the year. The price advantage of our country's steel is obvious, and the export of steel has maintained a high level. In June 2024, the export of our country's steel increased by 16.44% year-on-year to 8.745 million tons. In the case of poor real estate prosperity, the strong export is an important factor for the marginal improvement of domestic steel apparent consumption. We believe that the main reason for the increase in exports is the obvious increase in overseas steel prices, and the export of domestic steel has a more obvious price advantage. We calculate that as of June 2024, the price of our country's steel still has an obvious advantage compared with other major exporting countries overseas, with an average price difference of 67 US dollars/ ton.

**Supply and Demand Balance:** It is expected that the supply and demand of steel will be tight in the second half of the year. With the reduction of crude steel production and the marginal repair of steel demand, it is expected that the supply and demand of steel will be tight in the second half of the year. We expect that the supply and demand of steel will still be tight in the second half of the year: on the supply side, with the implementation of the Energy Conservation and Carbon Reduction Action Plan [Notice of the State Council on Printing and Distributing the Energy Conservation and Carbon Reduction Action Plan for 2024-2025], the industry's reduction is expected to be promoted in the second half of the year. We assume that the annual crude steel output will decrease by 1.5%, and the crude steel output in 2H will be 473 million tons, with an average monthly output of 8 million tons, which needs to be reduced by 9.5% compared with the first half of the year; on the demand side, we expect that the repair of real estate starts and sales will still be slow, but the landing of infrastructure physical work volume is expected to accelerate, and the prosperity of automobiles/ machinery manufacturing is expected to be good. We expect that the steel demand in August will welcome a bottom recovery, and with the arrival of the golden nine silver ten season, the supply and demand gap will gradually appear, and the differentiation between manufacturing and construction will be more obvious. We calculate that the steel demand for the construction industry in 2H will be 199 million tons (a quarter-on-quarter increase of 4.2%, a year-on-year decrease of 6.1%), and the steel demand for the manufacturing industry will be 287 million tons (a quarter-on-quarter increase of 8.4%, a year-on-year increase of 5.4%). The total domestic steel demand will be 486 million tons (a quarter-on-quarter increase of 6.7%, a year-on-year increase of 0.4%), and the supply and demand gap will be about 13 million tons.

**Furnace Materials:** Prices are expected to enter a downward channel, and profits in the black industry chain may be reallocated. Ore: The supply in the second half of the year is expected to be relatively loose, and the price center is expected to move down slightly. In the second half of the year, the supply of ore is expected to be relatively loose, and the price center is expected to move down. We calculate that the global iron ore output in 2H24 will be 1.241 billion tons, with an increase of about 30 million tons compared with the first half of the year. In terms of demand, the port inventory is gradually accumulating at this point, and the iron water output has reached a high level. Considering the implementation of domestic crude steel output control policy and the weak development of real estate and infrastructure, the demand for iron ore may not be able to break through further. We expect that the supply and demand gap of iron ore in the second half of the year will expand to 26 million tons, and the price center of iron ore may gradually move down with the relaxation of supply and demand.In the bottoming cycle, the core assets of the manufacturing industry with operational resilience have significantly outperformed. During this downcycle, as the demand in manufacturing and construction industries diverges, the Matthew effect in the industry has become more pronounced. The performance of individual stocks also shows a pattern of strong board and weak length, with high-quality leading steel companies fully demonstrating profitability and competitive advantages, and their stock performance is relatively prominent. Looking ahead, we believe that as the profitability of these excellent steel companies continues to be validated by the market, their competitive advantages will be further recognized by the market, which is expected to usher in a revaluation of value.

Focus on the undervalued core assets of the manufacturing industry. As a cyclical product at the bottom of the prosperity, we believe that steel should not be too pessimistic, especially for industries with strong prosperity and good cash flow and dividends at the bottom cycle, which are still undervalued. We believe that a reasonable trading environment and valuation can provide a more sufficient safety buffer space. From the trading perspective, the proportion of heavy positions in the steel plate in 2Q24 is 0.58ppt lower than the total market value, and the trading congestion is still at a low level. From the valuation perspective, the current P/B of the steel plate is 0.8x (about 5% in the past 10 years), and the average ROE is 7%, ranking in the bottom 10% among the first-level industries of Shenwan, still in a stage of low valuation and high safety margin. We believe that leading steel companies have medium and long-term investment value, and the current profit and valuation center are at the bottom of the cycle, patience and confidence are equally important.

Looking forward to the second half of the year, as domestic demand gradually recovers, steel production is further reduced, and the scissors difference between furnace materials and steel narrows, the industrial chain position of steel companies is expected to steadily improve, and the profits of the black industry are expected to usher in a rebalance. In terms of targets, we suggest focusing on two main lines: (1) Industry demand will continue to differentiate, and manufacturing core assets with strong competitiveness and excellent profitability are expected to further expand their production capacity and competitive advantages in the process of industry clearance. (2) Leading enterprises in special steel new materials, especially those who benefit from the recovery of manufacturing prosperity and have growth certainty in the sub-tracks.