After the recent pullback in Baima stocks, the stock market's interconnectedness has re-emerged, particularly within the steel sector. On November 30, the main rebar contract for 1805 hit an intraday high of 4,043 yuan per ton, marking a four-year high. In fact, since entering the fourth quarter, domestic steel prices have been on a steady upward trend.
According to a reporter from the 21st Century Business Herald, the price rebound driven by supply and demand dynamics has attracted renewed fund inflows. For instance, Masteel (600808.SH) saw its Shanghai Stock Exchange holdings increase from 9.34 million shares at the end of September to 19.4 million shares by November 29.
It’s worth noting that the heating season restrictions will continue until March 15 next year, which is expected to support steel prices. However, colder temperatures in the north after December may slightly affect downstream demand. Meanwhile, southern steel companies are expected to maintain relatively stable supply and demand, keeping steel prices elevated. This should translate into higher profits for listed steel companies in the fourth quarter.
The so-called "demand and supply double kill" narrative has proven misleading. As one of the key investment themes in A-shares this year, the rise in steel prices initially led to strong earnings growth for steel stocks. However, after steel prices broke above 4,000 yuan in September, they began to decline again.
Market expectations were that in the fourth quarter, limited production in the north and work site shutdowns would lead to a drop in both supply and demand, making it hard for prices to sustain their upward trend. But reality has shown otherwise.
Starting from November 10, large-scale production cuts were implemented in northern regions, leading to a decrease in supply. According to data from Lange Steel, the operating rate of 100 small and medium-sized steel enterprises nationwide dropped to over 70% in November, down from 80% in October and as high as 92% earlier in the year.
On the demand side, while work stoppages affected earthmoving operations, concrete pouring and framework construction continued. With no major weather disruptions in the north, downstream construction wasn’t severely impacted.
Xu Liying noted that last year, November marked the off-season for the steel industry, with prices declining during that period. However, this year's demand performance has been much stronger, especially due to infrastructure projects, which are expected to grow by over 19% year-on-year.
Lange Steel’s data also showed that the PMI index for the steel circulation industry reached 47.9 in November, up from 46.9 in the same period last year.
With 50% of Hebei’s production declining and demand slightly increasing, the “supply and demand†expectation was quickly falsified. As a result, steel prices started to rebound from mid-November, with the rebar 1805 contract breaking previous highs by November 30.
“Last week, rebar stocks in Beijing reached their lowest level since 2008, with some specifications out of stock,†Xu said. Wang Shulu added that building materials like thread and plate screws had risen by more than 300 yuan per ton this week.
These shifts in supply and demand are key drivers behind the ongoing rise in steel spot prices, and they’ve also prompted funds to re-enter the market, pushing prices even higher.
For example, the rebar 1805 contract saw a surge of 317,000 hands on November 29, although part of this was due to position shifting.
The impact of these fundamental changes extends beyond commodity prices, influencing the stock market as well. With the recent correction of White Horse stocks, the steel sector has become a standout performer.
Wind data shows that the steel sector has risen by 7.28% since October 20, ranking third in the SWS industry classification. Steel stocks have also attracted attention from Hong Kong-based investors, particularly leading players like Baosteel (600019.SH) and Baotou Steel (600010.SH).
Angang Steel (000898.SZ) saw a significant increase in Shenzhen Stock Exchange holdings, rising from 29.18 million shares on October 20 to 56.3 million shares by November 30. In contrast, Nangang Steel (600282.SH) saw a decline in Shanghai Stock Exchange holdings, dropping to 0.12% of outstanding shares by November 30.
Several factors have contributed to the recent rise in steel stocks. The collective decline of Baima stocks, such as liquor and household appliances, has led to a natural selection of cycle stocks with strong performance and liquidity.
Additionally, despite a drop in steel prices from September, the average steel price in the fourth quarter is expected to exceed that of the third quarter, meaning the profit margin per ton of steel continues to improve quarter by quarter.
In other words, listed steel companies still have room for growth in the fourth quarter. However, regional and seasonal consumption patterns mean that northern and southern steel companies will see different profit outcomes.
“Previously, there was a saying that ‘northland and northland’ would fall. After the north’s shutdown in the fourth quarter, more northern steel would flood the southern market,†Xu said. Currently, the price difference between northern and southern steel is narrowing, with Shandong steel being more cost-effective even with additional freight costs.
As a result, southern steel companies are likely to perform better than their northern counterparts under stable pricing conditions.
However, the end of December could be a risk point for the steel market. Lower temperatures may cause construction sites in the north to shut down, easing the tight supply situation. While steel products in South China are currently close to 5,000 yuan per ton, whether prices can continue to rise remains uncertain.
Moreover, after the supply-side reforms in 2016 and 2017, removing capacity from the steel industry will become more challenging next year, and the focus may shift toward mergers and acquisitions. This trend is already evident, as seen with companies like Three Steel Dawn (002110.SZ) resuming trading on November 27.
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