The steel sector experienced a surge, but the industry's supply and demand adjustments still need to be further deepened.

On September 24th, A-shares closed higher across the board, with the steel sector also experiencing a surge. Wind sector tracking data showed that the Angang Steel group rose 7.25%, the central state-owned steel sector rose 6.99%, the selected steel stocks rose 6.95%, and the Baowu Steel group rose 6.22%, all ranking among the top gainers. Several stocks, including Zhongnan Steel (000717.SZ), Lingang Steel (600231.SH), and Anyang Iron & Steel (600569.SH), hit their daily limit.

"Steel stocks have performed strongly in the past two days, rising continuously. This is mainly due to the positive impact of a package of policies, and has little to do with fundamentals," Wang Yingguang, senior analyst at Lange Steel Network, told Beike Finance. He explained that in the short term, steel companies' profits have recovered somewhat due to the mismatch between raw material and finished product prices. Profits for steel billets and construction materials have turned positive and further improved, leading to a slight rebound in steel production since the beginning of September. However, it remains at a low growth level, and it is difficult to continue to significantly increase production given the current slow recovery in demand.

Wang Yingguang predicts that daily crude steel output in September will likely remain low, hovering around 2.6 million tons. Therefore, supply in September will not exert excessive pressure, and the fact that rebar inventory is about 30% lower than last year's level will also provide some support for prices. The market needs to pay attention to the consumption of plate steel.

Recently, the steel industry received signals of further deepening supply-side structural reform. The Ministry of Industry and Information Technology (MIIT) issued a notice suspending steel capacity replacement work, requiring all regions to suspend the public announcement of new steel capacity replacement plans from August 23, 2024. Failure to continue publicizing as required will be considered as illegal addition of steel capacity and will be reported as a negative example.

"This notice from the MIIT is a timely measure in response to the expanding losses and operational difficulties in the industry," Wang Yingguang told Shell Finance. Since the implementation of the "Implementation Measures for Steel Industry Capacity Replacement" (MIIT [2021] No. 46), although the steel industry has effectively promoted transformation and upgrading, structural adjustment, layout optimization, and mergers and acquisitions through capacity replacement, problems such as inadequate policy implementation and imperfect supervision mechanisms still exist. These problems have led to some capacity replacement projects failing to achieve their expected goals, and even some instances of using the opportunity to expand capacity. Currently, the steel industry faces new challenges in its supply and demand relationship. Green and low-carbon development, structural adjustment, layout optimization, and mergers and acquisitions have placed new demands on capacity replacement policies.

Wang Yingguang stated that as the world's largest steel producer, China's steel production capacity is distributed throughout the country, and its overall capacity has reached a relatively high level. However, some regions are experiencing disorderly capacity expansion and redundant construction, and the steel production capacity structure is not entirely rational. Some outdated capacity has not been effectively phased out, while new capacity is often concentrated in high-efficiency, low-consumption areas. This structural contradiction restricts the overall development level and competitiveness of the industry. Therefore, suspending capacity replacement will prompt enterprises to focus more on high-quality development paths such as technological innovation, green and low-carbon development, and intelligent manufacturing. This will help improve the overall technological level of the industry, reduce energy consumption and emissions, and enhance market competitiveness.

Furthermore, Wang Yingguang emphasized that suspending steel capacity replacement work does not mean termination, nor will it have a significant impact on the current steel market. In the long run, it is of great significance to maintain the balance of market supply and demand, stabilize market prices, and protect the healthy development of the industry. In the short term, the most important thing for the market is not production capacity, but production control, and not crude steel production, but steel production.