Since the beginning of this year, under the increasing pressure of macroeconomic downturn, the production of the steel industry has continued to grow, steel prices have risen first and then fallen, steel mills and social inventories have been running at high levels, and the profitability of enterprises has been declining month by month. The market supply and demand have fallen into an imbalanced state, and the steel industry has not yet emerged from the trough.

1、 Operation status of the steel industry

（1） Production has reached a historic high. From January to June, the cumulative production of crude steel in China was 390 million tons, a year-on-year increase of 7.4%, with a growth rate 5.6 percentage points higher than the same period last year. In the first six months, the daily average production of crude steel was 2.154 million tons, equivalent to an annual production of 786 million tons of crude steel. Among them, the record high of 2.208 million tons was reached in February, and although there was a decline from March to June, it still remained at a relatively high level of over 2.1 million tons. Looking at the provinces and regions, from January to June, the crude steel production in Hebei and Jiangsu provinces increased by 6.8% and 13.2% respectively year-on-year. The total new production in the two provinces accounted for 42.4% of the national increase of 26.94 million tons. Other provinces such as Shanxi, Liaoning, Henan, and Yunnan also increased their production by more than 1 million tons. By enterprise type, from January to June, the crude steel production of key large and medium-sized steel enterprises increased by 5.5% year-on-year, which is 2 percentage points lower than the national average growth rate. However, 60% of the increase in production still comes from key large and medium-sized steel enterprises.

（2） Steel prices are running at a low level. From January to June, the overall performance of the domestic steel market was sluggish. With the significant release of crude steel production capacity, the market supply and demand are in an imbalanced state, and steel prices have entered a downward trend, which has been weak for more than 4 months. As of July 26th, the steel price index has dropped to 100.48 points, lower than the 6.6 points at the beginning of the year. The prices of the eight steel varieties that the Iron and Steel Industry Association focuses on have all decreased to varying degrees compared to the beginning of the year, with an average decline of 5.7%. In terms of varieties, the prices of construction wire rods and rebar, which account for a large proportion of China's steel production, have dropped by 4.9% and 6.7% respectively, while the prices of medium thick plates and hot-rolled coils have dropped by 5.7% and 9.7% respectively.

（3） The export of steel has grown rapidly. The imbalance between supply and demand in the domestic steel market stimulates enterprise exports. From January to June, China exported a total of 30.69 million tons of steel, a year-on-year increase of 12.6%; Imported steel was 6.83 million tons, a decrease of 1.8%, while imported steel billets and ingots were 320000 tons, an increase of 50%. Converting raw materials into crude steel, the cumulative net export reached 25.06 million tons, a year-on-year increase of 17.3%, accounting for 6.4% of China's crude steel production. From the perspective of export prices, the average export price of rods and wires from January to June was $624.3 per ton, a year-on-year decrease of 18%; The price of sheet metal was $835.2 per ton, a year-on-year decrease of 2.8%.

（4） Steel mills and social inventory are operating at high levels. The contradiction between market supply and demand is spreading to the circulation sector, and domestic steel inventories continue to grow at the end of last year. On March 15th, it reached a historical high of 22.52 million tons, an increase of 3.51 million tons from the previous year's peak. Among them, the inventory of construction steel was 14.32 million tons, accounting for 63.6% of the total inventory. Afterwards, as seasonal consumption increased, inventory gradually declined, dropping to 15.4 million tons on July 26th. The oversupply in the market has also pushed up steel mill inventories. In mid March, the steel inventories of key enterprises reached a historical record of 14.51 million tons, a year-on-year increase of 29.7%. In late June, they dropped to 12.68 million tons, still an increase of 29.9% from the beginning of the year and 11.4% from the same period last year.

（5） The profitability of steel mills has been declining month by month. In the first half of the year, the metallurgical industry achieved a profit of 73.69 billion yuan, a year-on-year increase of 13.7%. Among them, the black metal smelting and rolling processing industry achieved a profit of 45.44 billion yuan, a year-on-year increase of 22.7%. The profitability of key large and medium-sized steel enterprises from January to May was far below the overall level of the industry, and showed a decreasing trend month by month. Despite achieving a profit growth of 34%, it was only 2.8 billion yuan, with a sales profit margin of 0.19%. In May, 86 key large and medium-sized steel enterprises only achieved a profit of 150 million yuan, a continuous decline for five months compared to the previous month. Among them, 34 enterprises suffered losses, with a loss rate as high as 40%.

（6） The growth rate of fixed assets investment in the steel industry dropped significantly. From January to June, the fixed assets investment in the iron and steel industry was 303.5 billion yuan, up 4.3% year on year, including 235.6 billion yuan of investment in ferrous metal smelting and rolling, up 3.3% year on year, 6.1 percentage points lower than the same period last year; The investment in black metal ore mining and selection was 67.9 billion yuan, a year-on-year increase of 7.8%, with a significant decline of 15 percentage points in growth rate.

2、 New situation and characteristics of the operation of the steel industry

（1） The national steel production capacity continues to expand

From January to May, the steel investment in the top five provinces with steel production capacity, including Hebei, Shandong, Jiangsu, Liaoning, and Shanxi, accounted for 48% of the national total. Except for Shanxi, the investment in the other four provinces still maintains a large scale, with Shandong increasing by 57%. According to a survey conducted by Mysteel website, there were a total of 31 blast furnaces under construction or put into operation in China in the first quarter of this year, with a total volume of 40300 cubic meters and a designed production capacity of 38 million tons.

（2） The industry has a high debt ratio, and the risk of capital chain breakage has increased

From January to May, the total assets of large and medium-sized steel enterprises reached 4.3 trillion yuan, a year-on-year increase of 4.3%; The total liabilities amounted to 3 trillion yuan, a year-on-year increase of 6.5%; The asset liability ratio increased by 1.4 percentage points to 69.4%. Difficulty in financing and high financing costs have been common problems faced by steel enterprises in recent years. On June 19, 2013, the executive meeting of the State Council decided to strictly prohibit the provision of new credit for illegal construction projects in industries with severe overcapacity. Currently, bank cash flow is insufficient, credit scale is tightening, and the difficulty for steel enterprises to obtain bank loans is further increasing. The direct financing costs of short-term financing bonds, medium-term notes, and other instruments have significantly increased. Steel companies in various regions have generally reported that their capital chains are tight, and some enterprises have experienced shutdowns due to broken capital chains.

（3） The environmental pressure on steel enterprises is further increasing

The steel industry is one of the key industries for air pollution control. The new standards for pollutant emissions in the steel industry have significantly tightened the emission limits for particulate matter and sulfur dioxide, and have set stricter special emission limits for water and air pollutants in environmentally sensitive areas. At present, a considerable number of steel enterprises cannot meet the requirements of the new environmental protection standards, and they still need to increase their investment in environmental protection, resulting in further increase in production and operation costs. Some urban steel mills are also facing increasingly urgent environmental relocation pressure.

（4） The contradiction between supply and demand in the steel market is intensifying, and enterprises have no intention of reducing production

At present, there is an imbalance between supply and demand in the steel industry market. On the one hand, steel prices continue to decline, making it difficult for enterprises to produce and operate, even at a loss. On the other hand, production capacity is rapidly released, and enterprises have insufficient willingness to reduce production. The main reason for this is that companies are mainly concerned about losing market share, preventing the risk of bank loan suspension, and weighing factors such as marginal benefits under local growth pressure. From the perspective of the entire industry, there are almost no companies actively reducing production, and the continuous increase in production capacity has led to a sustained downturn in the steel market.

（5） The decrease in iron ore prices is much lower than the decrease in steel prices

On July 19th, the price index of imported iron ore was 447.09 points, a slight decrease of 2.8% from the beginning of the year. The cost of steel ore per ton only decreased by 66 yuan, while the average price of various steel varieties decreased by 237 yuan per ton, including 255 yuan for rebar, 403 yuan for hot-rolled coil, and 202 yuan for cold-rolled sheet. The decrease in imported ore prices is much lower than the decrease in steel prices during the same period, and the production costs of enterprises are still at a high level, making it difficult for operational efficiency to improve.

3、 Prediction of the trend of the steel industry in the second half of the year

The slowdown in domestic macroeconomic growth is driving economic growth; Three horse drawn carriage; All experienced varying degrees of decline. Recently, the bank; Money shortage; Triggering financial market volatility, the impact of tight funds on real estate investment and infrastructure construction will continue for a long time. In addition, July and August are the traditional off-season for demand, making it difficult to effectively improve the demand situation in the steel industry in the short term. At the same time, domestic steel production capacity continues to be released, and while steel companies still have marginal profits, there is insufficient motivation for them to reduce production. The daily crude steel production is difficult to return to below 2 million tons, and steel mill inventories will remain at a high level, exacerbating the contradiction of overcapacity. Under the dual factors of high output and low demand, steel prices will continue to operate at a low level, making it difficult for enterprises to significantly improve their profitability and industry production and operation conditions.

4、 Next steps and countermeasures

In order to ensure the smooth operation of the steel industry, we will work with relevant departments to make resolving overcapacity conflicts a key focus of structural adjustment in the steel industry, in accordance with the spirit of the Central Economic Work Conference. Cooperate in formulating and implementing the Overall Plan for Resolving Overcapacity Contradictions and relevant comprehensive policy measures; Further implement the "Twelfth Five Year Plan" for the development of the steel industry, ensuring the smooth implementation of various goals and tasks; Steadily promote the standardized management of the steel industry and create a fair competitive market environment for enterprises; Promote upstream and downstream cooperation in the steel industry, promote the application of high-performance steel, and facilitate the upgrading and replacement of steel products; Strengthen the guarantee of iron ore resources and support the construction of China's iron ore spot trading platform; Support enterprise technological transformation, energy conservation and emission reduction, eliminate backwardness, and promote structural adjustment in the steel industry.