Weekly iron and steel report: supply strictly limited, demand margin or warming Ⅱ

3. When will the cost side "Press iron ore to float coal" and "Coal Madness" stop?

With the strong promotion of the domestic crude steel production reduction policy, the cast iron output has declined continuously and the demand for iron ore has been restrained. High power graphite electrode to select. Under the expectation of weak demand, the iron ore has experienced  “a cliff -like drop” in the past two months. The price has fallen from the historical high of US $222.3 (Platts index: 62% grade) on July 15 to US $145.05 (September 3), a decrease of 34.7%, and the profit upon alienation to the steel plant is more than 900 yuan/ton (US $77.25 * 6.46 * 1.13 * 1.6).

However, recently, coking coal took over iron ore and started a crazy price rise. In August, coking coal rose again by 60% on the basis of the previous year-on-year rise of 80%. In September, it rose by 400 yuan/ton in just three trading days. The price of coking coal in part areas exceeded 4000 yuan/ton. The price of most coal has doubled in the same period. Under the soaring coal price, the profit of steel plants has fallen again.

When will the "Coal Madness" end? We believe that four factors will promote the reverse movement of coking coal price in the later period:

• First, the recovery of Mongolian coal supply. Customs clearance at 288 port has been resumed this week. Stimulated by high prices and high profits, future supply increases are only a matter of time;

• Second, high coal prices continue to push up the cost of molten iron. At present, the iron waste difference has reached 177 yuan (cast iron - scrap steel), the scrap steel cost-effective improvement and the marginal substitution will weaken the rising power of coking coal;

• Third, with the implementation of production protection measures of the National Development and Reform Commission and the easing of the power coal supply, part of the gas coal used for power generation will return to the coking coal market;

The most important factor is that with the in-depth promotion of the production restriction of steel plants, the current contradiction between supply and demand in the coking coal market will be significantly alleviated. 

According to the data of the steel union, the current average daily hot metal output of 247 steel plants is 2.2745 million tons, a year-on-year decrease of 194,000 tons/day. To complete the task of crude steel reduction, it needs to be reduced by 320,000 tons, the consumption of converted coking coal is 191,000 tons/day, and the monthly consumption is 5.74 million tons, which can basically offset the supply impact of the Australian coal import ban and the blocked customs clearance in Mongolia (the average monthly import of coking coal in 2019 was 6.22 million tons).

Therefore, looking forward, the future trend of iron ore and coking coal with the same burden will lead to the same path. Iron ore with high reservoir accumulation pressure may face a new round of adjustment after the peak demand season; although the supply bottleneck of coking coal is difficult to be greatly alleviated in the short term, production restriction leads to significant contraction of demand, rebalancing of supply and demand. After inventory reconstruction, the high premium at the supply end will fall sharply, raw material cost pressure easing, steel profits will significantly improve.

Investment suggestion: we believe that under the background of "Carbon Peak and Carbon Neutralization" with the rise of China's manufacturing industry, the relevant targets of the manufacturing industry have a long logic and are expected to improve the valuation and profit. It is suggested to pay attention to the enterprises that are less affected by the production reduction in the second half of the year, such as Tisco stainless steel, Xinsteel, Valin Steel, Baosteel, Angang Steel, Maanshan Steel, Liuzhou steel and Yongjin, Nanjing Iron & Steel, Chongqing Iron & Steel, etc., while paying attention to the history of high dividend target Fangda Special Steel, Sangang Minguang, etc., for more graphite news communicate with us.