Favorable policies combined with improving fundamentals are driving a turnaround in the steel industry.

The Fourth Session of the 12th National People’s Congress 5 The session opened at the Great Hall of the People on the morning of [date], where Premier Li Keqiang delivered the Government Work Report. The report contained numerous references—direct or indirect—to the steel industry. According to China Merchants Securities, the outlook for the steel sector hinges on a combination of vigorous supply-side restructuring and demand-side stimulus measures. Overall, this dual approach—robust supply-side deleveraging coupled with demand-side support—could reshape the industry’s supply‑demand dynamics, ushering in a fundamental turnaround. At present, the steel sector presents attractive investment opportunities.

There are two points related to the supply-side reform and capacity elimination:

First, “ Focus on resolving excess capacity and achieving cost reduction and efficiency gains. Prioritize capacity reduction in struggling sectors such as steel and coal, adhering to a market‑driven approach with enterprises as the main actors, local governments taking the lead, and central government support. Employ economic, legal, technological, environmental, quality, and safety measures; strictly control the addition of new capacity; resolutely phase out outdated capacity; and orderly withdraw from overcapacity. Implement measures such as mergers and reorganizations, debt restructuring, or bankruptcy liquidation to ensure proactive yet prudent handling. ” Zombie enterprises “ . Improve fiscal, financial, and other supporting policies; the central government has allocated 1000 A special fund of hundreds of millions of yuan is earmarked primarily for the reassignment and resettlement of employees. ”

China Merchants Securities believes that, 2016 The amount of outdated production capacity phased out annually may reach 5000 Ten thousand tons ( Currently, the total production capacity is approximately 12 hundred million )，2015 Annual crude steel production 8.01 hundred million tons, with a capacity utilization rate of approximately 67% , if 50 million tons of outdated production capacity are eliminated, the capacity utilization rate will increase to 71% , while capacity utilization exceeds 70% This will enable the industry to become profitable, and the overall industry outlook is expected to shift from losses to profitability.

Second, “ Step up efforts to control industrial pollution sources and implement comprehensive online monitoring for all polluting enterprises. Strengthen environmental protection inspections. The newly revised Environmental Protection Law must be strictly enforced; those who exceed or illegally discharge pollutants must be severely punished, and those who turn a blind eye or condone such violations must be held strictly accountable. ”。

China Merchants Securities believes that, in accordance with the requirements of the new Environmental Protection Law, private steel enterprises will see an increase in their per-ton steel costs. 60-100 Yuan. For 200 Steel enterprises with a capacity of 10,000 tons or more are generally able to absorb this cost, while… 300 Enterprises with an annual output of 10,000 tons or more can quickly absorb this cost. By contrast, the annual production volume… 100 Ten thousand tons and 100 Steel enterprises with capacities below 10,000 tons will face severe survival challenges. Environmental regulations, which increase per‑ton steel production costs, will also provide some support to steel prices and benefit those firms that have already met environmental emission standards. Companies that fully comply with national emission limits—such as Baosteel Co., Ltd., Taiyuan Stainless Steel Co., Ltd., Hebei Iron & Steel Group, and Xinxing Ductile Iron Pipes—will stand to gain significantly in this round.

From the demand side, the Government Work Report includes the following points relevant to the steel industry:

The first point is “ Economic growth target 6.5%-7%” . Based on considerations of economic transformation, it is expected that 2016 Year, per ten thousand yuan GDP Steel consumption will decline further. 7% Left and right, 2016 Ten thousand yuan per year GDP Steel consumption is approximately 95 kilogram ，2016 The estimated apparent domestic crude steel consumption for the year is 6.88-6.91 hundred million tons, a decline of approximately 1% . Additionally, in the medium to long term, for every ten thousand yuan GDP Steel consumption will gradually narrow to a stable level, meaning the decline in demand will progressively ease and eventually stabilize. Meanwhile, as supply-side reforms continue to advance, capacity utilization is expected to keep rising.

The second point is “ This year, a batch will be launched. ” 13th Five-Year Plan “ Plan major projects. Complete railway investment. 8000 Investment in highways exceeding 100 million yuan 1.65 Trillions of yuan, and another project is launched. 20 A major water conservancy project, along with the construction of large-scale initiatives such as hydropower and nuclear power plants, ultra-high-voltage transmission lines, smart grids, oil and gas pipeline networks, and urban rail transit systems. ” . Large-scale “ Railways, highways, and infrastructure ” Construction will stimulate “ Steel needs ” , creating opportunities for steel enterprises. According to estimates, every 100 million yuan of railway investment stimulates steel demand. 0.333 Tons calculation, estimation 2016 Annual railway construction boosts steel demand. 2664 Around ten million tons. Major projects in road infrastructure, hydropower, and nuclear power will also generate a substantial steel demand.

The third point is “ Deeply advance new‑type urbanization and accelerate the process of integrating rural migrants into urban life. ” , Deeply advance a new type of urbanization centered on people, and achieve 1 Around one hundred million rural migrants and other resident populations have obtained urban household registration, completing approximately… 1 The renovation of shantytowns and urban villages, home to hundreds of millions of residents, is guiding approximately… 1 Hundreds of millions of people are undergoing urbanization in the central and western regions, with urbanization rates rising. This trend not only benefits the construction sector but also sustains growth momentum in other major steel‑consuming industries, such as the automotive and machinery sectors, which are expected to maintain expansion this year and in the years ahead.

The fourth point is “ Promote the construction of affordable housing projects in urban areas and ensure the stable and sound development of the real estate market, with a focus this year on renovating dilapidated housing in shantytown areas. 600 Ten thousand sets ” . Based on empirical assumptions, the steel consumption per square meter for shantytown redevelopment and similar projects is 35 kilogram , each set of housing in the shantytown has an area of 60 square meters, then it will bring 1260 Steel demand of 10,000 tons.

The fifth point is “ Commence construction of urban underground utility tunnels. 2000 kilometer The above ” . Actively promote green buildings and building materials, vigorously develop steel‑structure and prefabricated construction, and raise the standards and quality of construction projects. Build smart cities, improve living environments, and ensure that the people can live with greater peace of mind, convenience, and comfort. Gain an understanding through the estimation index document… 1 rice The utility tunnel will require approximately 5.3 tons of steel, construction 2000 kilometer The utility tunnel, then, can generate 1000 The demand for tens of millions of tons of steel—particularly for construction steel and steel pipes—will be even more pronounced, creating new growth opportunities for the domestic steel industry. We recommend keeping an eye on Xinxing Cast Pipe.

The sixth point is “ Step up efforts to develop rural infrastructure, expedite the next phase of upgrading and modernizing the rural power grid, and ensure stable, reliable electricity supply in rural areas and universal electrification of irrigation wells in plain regions within two years. ” The construction and upgrading of distribution networks involve the development and modernization of substations, transmission and distribution equipment, and end‑user devices. These projects require substantial quantities of angle steel for grid infrastructure, copper and aluminum for power cable production, and silicon steel for manufacturing transmission and distribution equipment—providing significant tailwinds for the steel industry and offering strong support to domestic silicon‑steel producers. We recommend keeping an eye on Baosteel, Wuhan Iron & Steel, Shougang, and Ansteel. In addition, Dongfang Tower has repeatedly won bids for State Grid projects and could also stand to benefit from this round of grid upgrades.

The seventh point is to moderately expand the fiscal deficit, primarily to cut taxes and fees, thereby further easing the burden on businesses. Since last year, the government… 5 month 1 Starting on that day, reforms were implemented to lower the resource tax rate and shift the resource tax from a quantity-based to a value-based levy, yielding immediate results and providing substantial support in addressing the survival challenges facing the iron ore mining industry. This year’s further reductions in taxes and fees have created an important opportunity for the steel industry to transform and emerge from its difficulties.

The eighth point is “ Solidly advance ” Belt and Road Initiative “ Build and expand international capacity cooperation, promote the global outreach of equipment, technology, standards, and services, and forge a world‑class “Made in China” brand. ” The Belt and Road Initiative’s regional development will create industry‑wide opportunities for the infrastructure sector along its route. The Eurasian continent is vast, yet the steel production levels of the regions and countries involved generally fall far short of China’s. Should the Belt and Road strategy be implemented smoothly, regional steel shortages are highly likely, enabling substantial exports of steel products and shifting the industry’s primary challenge from overcapacity to addressing demand‑driven constraints.

China Merchants Securities notes that, taken together, the combination of aggressive supply-side restructuring and demand-side support could reshape the steel industry’s supply‑demand dynamics, paving the way for a fundamental turnaround.