Guosheng Securities: The steel sector has the potential for absolute returns, and policies are also expected to generate excess gains

Guosheng Securities released a research report stating that the absolute valuation level of the steel sector has recovered from being significantly undervalued to a moderately low position. The valuation bubble is not large, and it does not incorporate expectations of further profit recovery. There is still room for absolute gains. If supply-side adjustments rely solely on market-based mechanisms, the process will be slow and gradual. However, in countries with mature industrialization, this period often sees strengthened control over heavy asset industries and promotion of mergers and acquisitions at cycle lows, leading to reengineering of existing production models. If these policies are strictly enforced, they will further improve capital returns, and the sector could achieve excess returns.

Main points from Guosheng Securities are as follows:

2026 January-February Steel Industry and Previous Customs Import-Export Data

In January-February 2026, crude steel production was 160.34 million tons, a cumulative decrease of 3.6% year-on-year; the average daily crude steel output was 2.718 million tons, up 23.6% from December 2025. In the same period, pig iron production was 137.7 million tons, down 2.7% year-on-year; steel product output was 221.19 million tons, down 1.1% year-on-year; steel exports were 15.59 million tons, down 8.1% year-on-year; steel imports were 830,000 tons, down 21.7% year-on-year; iron ore imports were 210.02 million tons, up 10.0% year-on-year.

Crude steel output has declined year-on-year but increased significantly month-on-month.

Data quality for steel production from May 2025 to the end of the year was poor and showed low consistency with Steel Union’s ironmaking data. The decline in crude steel data quality may be related to production reduction pressures in 2025, with some regional data diverging significantly from actual output, affecting demand estimates for 2025. For January-February 2026, apparent steel consumption was 206.43 million tons, a slight decrease of 0.8% year-on-year. The average daily steel production in January-February 2026 increased by 0.8% month-on-month from December 2025. Meanwhile, the blast furnace utilization rate of 247 steel mills remained stable at around 85%. However, the daily crude steel output surged by 23.6% month-on-month, indicating that the previous data quality concerns are valid. Given the poor year-on-year data quality for crude steel last year, using steel product growth rates to gauge actual economic activity may be more accurate. Economic fluctuations during the transition period are less severe than the “statistical fluctuations” in crude steel data. The government’s report at this year’s Two Sessions emphasizes maintaining overall stability while focusing more on structural adjustments during the transition. Economic transformation takes time, and systemic risks are relatively low during this period, with limited opportunities for rapid growth. The economy is expected to oscillate between recession and recovery, gradually converging. This convergence allows for sufficient stability to carry out structural reforms. In the first two months, net government bond financing reached 828.9 billion yuan, and net local government bond issuance was 1.77 trillion yuan, continuing high growth. Structurally, in January-February 2026, fixed asset investment (excluding rural households) was 52.721 trillion yuan, up 1.8% year-on-year; total retail sales of consumer goods were 86.079 trillion yuan, up 2.8%; and the added value of industrial enterprises above designated size increased by 6.3% in real terms. The economy’s growth driver is shifting from investment to consumption. China’s industrialization has entered a mature phase, and its overall economic position suggests it remains stable and controllable.

Steel net exports slightly decreased in the first two months, with external demand expected to remain resilient.

In January-February 2026, steel net exports were 14.76 million tons, down 7.3% year-on-year; February’s net exports were 7.47 million tons, roughly flat compared to the same period last year. Since 2025, strong exports from manufacturing sectors like automobiles and home appliances have indirectly boosted steel exports. During January-February 2026, China’s total foreign trade value was 7.73 trillion yuan, up 18.3% year-on-year. Exports totaled 4.62 trillion yuan, up 19.2%. Structurally, China’s trade with ASEAN was 1.24 trillion yuan (up 20.3%), with the EU 998.94 billion yuan (up 19.9%), and with the US 609.71 billion yuan (down 16.9%).

Previously, the firm indicated that tariffs currently have minimal impact on China’s economy. History shows that during Kondratiev downturns, decoupling by leading countries does not change the overall outcome. As long as the starting point of global trade remains dominated by the main deficit country, even if the catching-up countries’ trade surplus with the main country decreases, their overall trade surplus will not decline. Instead, trade flows shift from direct to indirect trade, reducing efficiency and raising inflation. China’s export pressure is primarily due to US fiscal policy, not tariffs or trade policies. Over the past five years, US fiscal spending and deficits have expanded significantly, causing imports to rise sharply. The US trade deficit fluctuates with fiscal policy. To truly reduce the deficit, the US must drastically cut its fiscal spending. Fiscal and trade deficits are interconnected; solving the trade deficit requires addressing the fiscal deficit. However, at the end of the national lifecycle, domestic wealth polarization and public dissatisfaction prevent reducing welfare. As long as the US fiscal deficit remains unresolved, tariffs and trade policies will only shift trade flows without significantly changing the final outcome.

Market outlook

In the short term, ongoing US-Iran geopolitical conflicts could lead to energy price spikes, impacting the global economy. All cyclical mechanisms can be understood as price responses to growth. When Kondratiev waves enter resource-constrained phases, rapid resource price increases combined with declining capital returns can trigger economic shocks. Previously, the firm warned that US government debt might become increasingly difficult to absorb, with its Ponzi-like balance fragile. An annual fiscal deficit of $2 trillion, if not financed by larger debt, increases the likelihood and urgency of central bank purchases. A new round of fiscal deficit monetization could surpass market expectations, accelerating dollar depreciation and causing large capital flows. Energy shocks could serve as a trigger for US fiscal deficit monetization. If concerns are rooted in monetary system stability, precious metals are the best bubble carriers.

Related stocks

Recommend continuing to watch Huagang Steel, Nanjing Steel, Baosteel, Fangda Special Steel, Xinxing Ductile Iron Pipes, and emerging companies benefiting from pipeline renovation and steel profitability, such as Nanjing Iron & Steel. Also, focus on companies benefiting from coal power construction and oil & gas cycles, like Changbao Shares, and those benefiting from demand recovery and nickel-plated steel casing, such as Yongjin. Additionally, Wujin Stainless Steel, which benefits from coal power construction and import substitution trends, is worth attention.

Risk warning: Unexpected domestic production control policies, weaker-than-expected downstream demand, and raw material prices rising beyond expectations.