Guotai Haitong has maintained an "overweight" rating for the steel industry in its latest research report. The report suggests that the long-term trend for the steel sector includes increased industry concentration and the promotion of high-quality development, which will benefit companies with advantageous product structures and cost efficiencies. In the context of stricter environmental regulations, ultra-low emissions modifications, and carbon neutrality initiatives, leading companies are expected to further enhance their competitive advantages and profitability.

Key recommendations include: 1) companies with leading technology and product structures; 2) specialty steel leaders with undervalued high dividends, high-barrier material companies, and high-temperature alloy leaders; 3) upstream resource products that benefit from a trend of demand recovery and possess long-term structural advantages.

Guotai Haitong's main observations are as follows:

Demand has increased month-on-month, and inventories have decreased. Last week (defined in this report as the week from October 20 to October 24, 2025), the apparent consumption of five major types of steel reached 8.9273 million tons, increasing by 173,200 tons from the previous week. Among this, the apparent consumption of construction materials was 3.1526 million tons (up by 110,900 tons), and that of sheet metal was 5.7747 million tons (up by 62,300 tons). The production of the five major types of steel was 8.6532 million tons, an increase of 83,700 tons; total inventory stood at 15.5485 million tons, decreasing by 274,100 tons and maintaining a low level.

Last week, the operating rate of blast furnaces in 247 steel mills was 84.71%, rising by 0.44 percentage points, with a blast furnace capacity utilization rate of 89.94%, down by 0.39 percentage points. The operating rate of electric furnaces remained stable at 60.9%, while electric furnace capacity utilization decreased by 0.23 percentage points to 52.27%.

Following the holiday, demand has resumed growth, and inventories are back on a downward trend. However, profitability has decreased month-on-month. Last week, the imported iron ore inventory was 14.424 million tons, rising by 145,000 tons. The simulated average gross profit for rebar was 126.1 yuan per ton, an increase of 14.5 yuan; for hot-rolled steel, it was 16.1 yuan per ton, down by 5.5 yuan. The profitability of 247 steel companies was 47.62%, down by 7.79%.

Looking ahead, the firm expects accelerated production growth of iron ore without significant demand increases, indicating that iron ore may gradually enter a loose cycle with limited upward price elasticity. The constraints on steel costs are expected to gradually improve, and the industry's profitability center is likely to recover gradually.

Expectations for stabilized demand and ongoing supply contraction are noted. As the real estate sector declines, its proportion of steel demand continues to decrease, and the negative drag from real estate on steel demand is expected to weaken significantly. Demand for steel from infrastructure and manufacturing sectors should see steady growth.

Regarding exports, from January to September, steel exports maintained year-on-year growth. Overall, the firm anticipates that steel demand will stabilize gradually. From the supply side, more than 40% of steel companies are still reporting losses, indicating that market-driven adjustments in supply are beginning to occur.

On the policy front, the recently released "Steel Industry Stability and Growth Action Plan (2025-2026)" emphasizes continuing production reduction policies. These aim to control annual output by supporting the development of advanced companies and encouraging the exit of inefficient capacity to enhance dynamic balance between supply and demand. The firm maintains its expectation for supply-side contraction and believes the steel fundamentals will gradually recover.

Risk warning: Supply-side contraction may fall short of expectations, or demand may decline sharply.