Carbon Neutral "Iron And Steel" Market: Tangshan'S Iron And Steel Limited And Silent

Dong Peng, senior researcher of 21st Century Capital Research Institute, director of Lange Iron and Steel Research Center, Wang Guoqing

On March 23, Cathay Pacific Fund made three selling points of "carbon neutralization + supply side + undervalue" in the promotion of its own steel ETF.

How similar is this to the centralized de capacity launched in 2016?

It is also the supply side reform and the starting point of the new five-year plan, which has also triggered a fierce reaction in product prices and capital markets

Taking Tangshan, an important iron and steel town, as an example, a series of iron and steel pollution control measures were released in late March under the sudden attack of the Ministry of ecology and environment after dropping out of the top 10 air quality ranking.

At least 30% of the local production restriction has also stimulated the billet price to reach a new high in nearly 13 years.

During the year, the Ministry of industry and information technology has made a statement for many times, such as "firmly reducing the crude steel output to ensure that the crude steel output in 2021 will decline year on year".

Under the background of carbon peaking and carbon neutralization, the process of "de production" in the steel industry is slowly starting. Some people in the industry call it "the second supply side reform".

However, compared with the previous cycle, how will the industry supply-demand relationship and product prices be deduced in this cycle?

After Tangshan production restriction, will other cities with lower air ranking follow up?

According to the same production restriction, how much capacity is expected to affect the supply side?

These factors directly determine the recovery height of the future steel industry, as well as the profitability of related enterprises and the level of secondary market valuation.

Therefore, the 21st Century Capital Research Institute and Lange Iron and Steel Research Center jointly launched this issue of "21 hard core investment research", hoping to deepen investors' understanding of the industry through qualitative and quantitative analysis, as well as the potential evolution direction of the industry in the future, so as to reduce the fundamental variables of relevant listed companies as far as possible.

What is the position of prosperity?

Simply from the price comparison, the current steel price is significantly higher than the peak value of de capacity in 2017.

On March 24, the settlement prices of the main contracts of screw thread and hot coil were 4733 yuan / ton and 5124 yuan / ton respectively.

In the accelerated phase of de capacity in the industry in 2017, the high points of these two steel products were only 4418 yuan / ton and 4400 yuan / ton.

Compared with the previous cycles, the profitability of the industry is at a low level.

Since 2008, the domestic steel industry has experienced at least five cycles of obvious rise or fall.

They are from the end of 2008 to July 2011 (the "four trillion" investment period), August 2011 to the end of 2015 (overcapacity), early 2016 to the end of 2018 (centralized de capacity stage), 2019 to the end of March 2020 (post capacity + epidemic situation), and April 2020 to the present (economic recovery, ore and coke costs stimulate the rise of steel prices).

During this period, the main driving force of leading industry operation and the driving force of supply-demand relationship evolution.

The 21st Century Capital Research Institute has summed it up as the following five stages:

The first stage: from the end of 2008 to July of 2011, the global impact of the subprime mortgage crisis appeared, China's export environment deteriorated, and the steel market prices fell sharply. At the end of 2008, the state launched a 4 trillion investment and ten major industrial revitalization plans. With the economic boost, the growth of steel demand pushed the steel market upward.

The second stage: from August 2011 to the end of 2015, under the background of 4 trillion investment, steel industry investment increased, overcapacity gradually appeared, market competition was fierce, steel prices fluctuated downward, industry profits continued to decline, and serious losses in 2015.

According to the monitoring data of Lange Steel's cloud business platform, by December 2015, the lowest price of steel billet reached 1460 yuan / ton, and the lowest price of grade III rebar reached 1823 yuan / ton.

The third stage: from the beginning of 2016 to the end of 2018, in the face of such phenomena as excessive output, disordered competition and serious losses in steel and coal industries, the state proposed supply side structural reform in November 2015. From 2016 to 2018, the iron and steel industry achieved the goal of 150 million tons of overcapacity and banned 140 million tons of ground bar steel. The industry's supply environment continued to improve and the market price fluctuated upward.

The fourth stage: from 2019 to the end of March 2020, with the gradual decline of the policy dividend brought about by the structural reform of the supply side and the impact of the epidemic situation in the first quarter of 2020, the high supply pressure of the steel industry appears, and the steel market price fluctuates downward.

The fifth stage: from April 2020 to now, economic recovery + cost promotion. In the second quarter of 2020, with the increase of China's counter cyclical adjustment and economic recovery, the supply and demand of iron and steel industry are booming, and the cost of raw materials such as iron ore and coke is pushed up, and the steel market is in shock and upward direction.

It can be seen from the comparison that the recent round of steel price rise is mainly driven by the rising cost of iron ore and coke, as well as the rise of bulk commodity prices under the global monetary easing, the increase of environmental protection and production restriction caused by carbon peak and carbon neutralization, and the improvement expectation of supply and demand under the constraint of output.

Because of this, under the sharp rise in costs, the profit of the steel industry has been seriously engulfed. The current profitability of the steel industry is at a relatively low level since the nearly 10-year cycle, which is only slightly stronger than the downturn stage of overcapacity in 2014 and 2015.

According to the calculation results of Lange Iron and Steel Research Center, in February, the average gross profit of seven types of steel per ton, including billet, wire rod and rebar, was - 89 yuan / ton. With the rise of steel price in March, the profit margin was restored to some extent, but it was only 110 yuan / ton.

In contrast, during the peak period of de capacity in the industry in 2017, this value once exceeded 1100 yuan / ton. At present, there is a great gap between the prosperity of the whole industry and the supply side reform period.

Corresponding to the level of enterprise operation, the lower profit space makes it difficult to significantly improve the profitability of relevant listed companies, and the overall profit scale performance is poor.

"Second supply side reform" expectation brought by carbon peak

The profitability of the industry is at the bottom, but in the trend of A-share market from February to now, steel stocks have sprung up.

During the period from February 10 to March 12, 36 iron and steel stocks (including ordinary steel and special steel enterprises) increased by 19.4% on average. During the same period, the Shanghai Shenzhen 300 index and Wande all a index increased by - 4.79% and 5.38% respectively.

The 21st Century Capital Research Institute and Lange Iron and Steel Research Center believe that this is mainly due to the rotation of A-share plate. The market chose to sell liquor, new energy and other leading stocks with excessive cumulative increase, and switched to the pro cyclical plate with more valuation advantages. In addition, the popularity of the concept of "carbon neutrality" and the expectation of potential changes in the industry's supply side finally led to the collective rise of steel stocks.

There is a certain industry foundation for the above expectations.

Compared with the historical data, it can be seen that the domestic crude steel output has continuously increased in recent 20 years, from less than 200 million tons to more than 1 billion tons in 2020.

In 2019, China's carbon dioxide emissions will reach 9.826 billion tons, accounting for 28.76% of the world's total. China is the world's largest carbon emission economy.

Among them, 3.936 billion tons of carbon were discharged from the power sector, accounting for 40.05%; 916 million tons were emitted from the transportation sector, accounting for 9.32%; 762 million tons were emitted from the living area, accounting for 7.76%; and the carbon emission from the steel industry accounted for about 15%.

In other words, the iron and steel industry is the first "big emitter" in the domestic industrial manufacturing industry.

So, in order to achieve the goal of carbon peak and carbon neutralization, the steel industry can not avoid reducing carbon emissions.

As for the specific implementation path, the 21st Century Capital Research Institute and Lange Iron and Steel Research Center believe that it mainly includes the following four aspects:

(1) New smelting technologies, such as hydrogen smelting technology and electrolysis technology, are explored to reduce the application of carbon dioxide and thus reduce carbon dioxide emissions; carbon capture and Application Technology (cuss) collects and processes the carbon dioxide emitted. The products of this technology can be converted into agricultural fertilizer or used as catalyst for oil exploitation, or can be compressed and sealed Exhausted oil fields, natural gas fields, seafloor and other safe places.

(2) The application of new energy will change from the previous thermal power application to wind power and solar energy, so as to reduce the indirect carbon emission generated by thermal power application.

(3) Compared with converter steelmaking, the carbon emission of EAF steelmaking is greatly reduced. The carbon dioxide emission of long process blast furnace + converter process is the largest, which is more than 2.1 tons per ton of steel, while the emission of electric furnace process with 100% scrap is only 282kg.

(4) To reduce production, carbon emissions can be reduced directly through production reduction.

The message from the 12th China Iron and Steel Development Forum in 2021 (the 12th) is that the revised draft of the action plan for carbon peak and carbon reduction in iron and steel industry has been formed. The five implementation paths are to promote green layout, save energy and improve energy efficiency, optimize energy consumption and process structure, build an industrial chain of circular economy and apply breakthrough low-carbon technologies.

In addition, the preliminary goal set by the action plan is that "by 2025, the carbon emission of the steel industry will reach its peak; by 2030, the carbon emission of the steel industry will be reduced by 30% compared with the peak value, and the carbon emission reduction is expected to be 420 million tons."

According to the existing smelting technology, raw material structure, and the statements of the Ministry of industry and information technology, China Steel Association and other relevant departments, the most direct and effective way to achieve carbon peak in the iron and steel industry at this stage is to reduce production.

Luo Tiejun, vice president of China Iron and Steel Association, pointed out that "in the past 15 years, the comprehensive energy consumption per ton of steel in iron and steel enterprises has decreased from 694 kg of standard coal to 545 kg of standard coal, but the decline rate of unit energy consumption has been weakened year by year, and the space for further reduction is limited. Therefore, in order to achieve the carbon peak, the first step is to reduce the steel production, especially the iron output."

In this context, the output of 1.065 billion tons of crude steel in 2020 will become the peak of industry supply during the "14th five year plan".

The effect of setting the upper limit at the supply side is similar to the effect of de capacity in 2016, so the industry has formed the expectation of "the second supply side reform".

Production restriction forecast: Hebei and other four provinces can reduce production by 70 million tons at most

World steel looks at China, China Steel looks at Hebei, Hebei steel looks at Tangshan

If the steel industry wants to achieve carbon peak in the "14th five year plan", it is inevitable to seize the main producing area of Tangshan.

According to the data, in 2020, the output of pig iron in Tangshan will be 133 million tons, accounting for 14.98% of the whole country; the output of crude steel will be 144 million tons, accounting for 13.52% of the whole country.

On March 19, the office of Tangshan air pollution prevention and control leading group issued the notice on submission of production restriction and emission reduction measures for iron and steel enterprises, which was implemented from March 20 to December 31, with the emission reduction ratio of 30% - 50%.

This is also the specific action taken by Tangshan to withdraw from the "top 10 polluted cities" in the "ten measures for comprehensive air pollution control in Hebei Province" in 2021.

According to the calculation results of 21st Century Capital Research Institute and Lange Iron and Steel Research Center, from March 20 to December 31, 2021, the plan of 30% - 50% production restriction in Tangshan will affect the pig iron output of Tangshan about 30 million tons. According to the 15% converter scrap ratio, it is estimated that the impact on crude steel output is about 34 million tons.

According to the monitoring of Tangshan production trend, 104 blast furnaces have been eliminated and stopped in Tangshan. On March 23, 40 blast furnaces were shut down, and the blast furnace operating rate was 61%.

This is a relatively certain "reduction" of domestic steel supply side, but only relying on the expected value of 34 million tons of production reduction, and based on the national output in 2020, the overall impact is only about 3.2%.

More importantly, will other cities with lower air quality follow up with production restriction?

The Ministry of ecological environment released the national ecological environment quality profile in 2020, which shows that the 10 cities with relatively poor air quality (from the penultimate to the last 10) are Anyang, Shijiazhuang, Taiyuan, Tangshan, Handan, Linfen, Zibo, Xingtai, Hebi and Jiaozuo.

Four cities in Hebei Province were listed on the list, but the relevant "ten backward" timetables were released successively. Among them, Tangshan Xingtai will "back ten" this year, and Shijiazhuang Handan will "back ten" next year.

According to the 21st Century Capital Research Institute and Lange Iron and Steel Research Center, although the current industry production restriction is limited to Tangshan, and there is no follow-up in other regions or the further issuance of relevant department documents, under the carbon peak and carbon neutralization targets of various provinces and cities, the steel industry, as a major carbon emitter, may follow Tangshan's emission reduction efforts.

At present, some provinces, including Henan Province, have formulated the environmental performance rating of steel enterprises similar to Tangshan. Through the production process level, governance technology and other indicators, the performance rating rules are formulated, and the industry enterprises are divided into a, B and C levels. According to different weather conditions, different measures are taken to stop and limit production.

Compared with the above table, it can also be seen that the cities with lower air quality are mainly concentrated in Hebei, Henan, Shandong and Shanxi, which account for 40.51% of China's crude steel production, with a total output of 431.4 million tons in 2020.

According to the estimation of Tangshan's output reduction rate, the reduction rate of crude steel in the above four provinces is expected to reach about 70 million tons. According to the national crude steel output of 1.065 billion tons in 2020, it is equivalent to a year-on-year decrease of 6.57%.

In addition, combined with the change of crude steel output, Hebei, which is the focus of the production restriction, has a limited increase. Instead, Shandong and Shanxi are the two provinces where air pollution cities are relatively concentrated. In 2020, the crude steel output has increased significantly.

In the context of carbon peak and industry "de production", the above provinces are more likely to follow up Tangshan production restriction.

Although some seller's organizations believe that "we are standing at the new starting point of a new prosperity of the steel industry", the contraction of the supply side of the whole industry will be significantly smaller than that of the industry's de capacity stage from 2016 to 2018 only from the perspective of the expected maximum production reduction of 70 million tons.

For example, in the first half of 2017, more than 600 "ground bar steel" production enterprises were banned and shut down, involving a production capacity of about 120 million tons. During the 13th Five Year Plan period, the domestic steel production capacity was about 200 million tons, and 140 million tons of ground bar steel were all cleared. At that time, the total output of crude steel in China was less than 800 million tons.

Correspondingly, the driving force of this round of price rise will be weaker than that from 2016 to 2018, which is equivalent to a "reduced version" of supply side reform.

As for the long-term goal of "by 2030, the carbon emission will be reduced by 30% compared with the peak value", the capacity replacement in the form of electric furnace instead of blast furnace may be adopted, which has little impact on the short-term supply-demand relationship of the industry. (Editor: Li Xinjiang)