Source: Warburg Securities

Event 1: The steel association held an information conference to answer the questions of output reduction and how to balance production and demand. It is believed that the Ministry of Industry and Information Technology proposed to reduce steel production in 2021 should have three aspects of consideration, 2021 steel demand will maintain a small growth, steel supply pattern under the new situation is bound to change, the import and inventory of self-regulation will help to make up the gap between production and demand.

Comments: Under the market economy, the output of goods is mainly driven by demand and theoretical capacity. At present, domestic and overseas economies are recovering, steel demand is better expected, so the industry has questions about the implementation of crude steel production reduction, steel association from the background and necessity to give an answer; At the same time employment within the focus of the recovery cycle, steel production will reduce the tension between supply and demand? The steel association believes that the market can effectively ease the contradictions through imports and destocking. Overall, the steel association this information conference fully responded to the concerns of the industry to cut production.

There is little room for destocking to make up the gap between production and demand, and there is room for improvement in imports during the transformation of supply pattern. By the third week of January, steel stocks in major cities were 10.16 million tons, the same as last year's pre-epidemic level. Overall, further destocking to make up for the gap between production and demand space is small. From the data of 2020, there is room for import to improve in the process of future supply pattern transformation.

The difference between domestic and foreign steel prices will be the key factor in determining steel imports. At present, there is still a large price gap between domestic steel market and traditional steel consumption countries such as Europe, America and Japan. At present, among the four major varieties of steel, except for cold-rolled sheet, which is slightly higher than Japan, other products are lower than important economies. The price difference between domestic and foreign steel will become the key factor to determine the import of steel. Spreads widen, steel exports to China shrink. At the same time, the price difference will create profit for domestic steel space.

Investment advice. With the gradual recovery of the economy, domestic steel consumption is expected to grow slightly. In the future, the reduction of crude steel output will promote the transformation of the domestic supply pattern, and imports will become an important source to make up for the imbalance between production and demand. At present, Europe, Japan and South Korea and other important steel consumer economy is recovering, steel demand recovery; There is a large steel price gap between China and Europe, America, Japan and South Korea, and narrowing the steel price gap will create profit improvement space for domestic steel enterprises. We maintain the previous advice: at present, the valuation of the steel sector is in the historical low intersecting range, the fundamentals of steel companies cold rolled products continued to improve the foundation of solid, the valuation of the related target companies have a good foundation to repair. Overall, the current investment layout of high-end cold-rolled products is the right time. It is recommended that we continue to focus on companies that produce high-end cold-rolled products.