Shenwan Hongyuan Group Co., Ltd. has released a research report highlighting that the steel industry is currently at a cyclical low in terms of fundamentals, valuations, and institutional positioning, urging attention to positive changes within the sector. The brokerage believes that industry mergers and acquisitions will likely drive future concentration, leading to an overall improvement in the supply landscape.

The firm anticipates a subsequent decline in the central price of iron ore, which should help repair profit margins for steel enterprises. In this cyclical trough, leading companies are expected to maintain stable profits, with significant upward flexibility driven by expectations of lower costs.

A Clearer Path to Supply Consolidation

Policy-driven production limits and cash flow pressures on certain companies are accelerating the exit of capacity. Under the national "anti-internal competition" backdrop, steel production cuts remain a long-term theme, with energy-saving and carbon-reduction requirements likely to hasten the elimination of outdated capacity. Mergers and acquisitions are also expected to boost industry concentration, creating a more optimized supply structure.

Demand Shows Resilience on Infrastructure and Manufacturing Support

On the demand side, infrastructure spending is expected to pick up marginally in the second half of the year, with the issuance of special bonds likely to accelerate. Combined with robust manufacturing demand, the outlook is not overly pessimistic. The research suggests that strong demand from the manufacturing sector will provide a buffer, making a sharp downturn unlikely.

Iron Ore Prices Set to Fall, Shifting Profit to Steelmakers

With the Simandou iron ore project coming on stream, iron ore supply is expected to loosen at the margin. Simultaneously, steel output controls will curb iron ore demand, leading to a projected drop in the central price of iron ore. This will help rebalance the profit distribution along the value chain, benefiting steel producers.

Investment Strategy: Focus on Dividends and Cyclical Upside

From a safety perspective, the report recommends paying attention to companies with high dividend payout ratios, such as Nanjing Iron & Steel Co., Ltd., Baoshan Iron & Steel Co., Ltd., and Citics Metal Co., Ltd. For cyclical upside, Valin Iron & Steel Co., Ltd. and Liuzhou Iron & Steel Co., Ltd. are highlighted.

Longer term, specialty steel for energy, aerospace, and defense applications is becoming a major growth driver. The report suggests watching Zhejiang Jiuli Hi-Tech Metals Co., Ltd., a high-end stainless steel pipe producer, and Yongjin Technology Group Co., Ltd., which is expanding from stainless steel cold rolling into titanium alloy materials.

Key Risks to Watch

The risks include raw material prices exceeding expectations and downstream demand falling short of forecasts.