Chinese steelmakers rally on expectation of production cut in second half

 

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Chinese steelmakers staged a strong rally on Tuesday, with an index tracking the sector compiled by Wind Information gaining more than 2%, making it the best-performing sector in the A-share market on the day. Companies including Anyang Iron and Steel, Chongqiang Iron and Steel surged by the daily limit of 10%.

The rally was driven by market speculation that the authority will soon announce the official requirement for the sector to keep their annual crude steel production in 2023 in line with that in 2022. 

According to commodity consultancy Mysteel, some mills in Yunnan province have received a notice from the local authority, requiring them to report their production cut plan in accordance to the target for 2022 crude steel output.

If confirmed, it would mean that steelmakers will need to reduce production in the second half of 2023 as China’s crude steel output in the first half rose by 1.3% from a year earlier. Analysts believe that production cut will help improve the sector’s profit.

In addition, Chinese authorities have pledged to optimize real estate policy based on the new demand and supply dynamic in the housing market and promote the stable and healthy development of the struggling sector. 

Zhongtai Securities upgraded the rating for the steel sector to Overweight, saying that the sector’s valuation is currently at the bottom with limited downside room.

The steel sector’s average profit per tonne is at a historic low and as the macro economic expectation improves and real estate policy is optimized, downstream steel demand is expected to pick up, and combined with expected contraction in the supply side, the sector’ profit is expected to recover further, the broker said.