China Steel: Slow recovery, with supply discipline unlikely to trigger a turning point until end-2026

Overview

This report focuses on supply and demand, pricing, policy, and earnings prospects for covered companies in the China steel industry. HSBC believes that in 2026 the sector will still be caught between weak demand and excess supply: new residential starts continue to fall, infrastructure demand is approaching a plateau, and while exports show some resilience, their share of total output is limited and cannot single-handedly lift industry margins. On the policy side, the anti-involution campaign launched in July 2025 and the steel industry work plan mark a shift from short-term stimulus to restoring order, constraining capacity, enforcing environmental compliance, and controlling carbon emissions. The report's core view is that the steel industry's turning point is unlikely to come from a rapid rebound in demand, but rather from a gradual contraction of effective capacity after 2H26.

Core views

The key views are as follows: first, the loss trend seen in 2025 largely continued into 1Q26, with Angang and China Steel Corp still in the red, while Maanshan remained relatively stronger thanks to Baowu system support, cost advantages, and a better product mix. Second, the short-term rise in steel prices was driven mainly by raw material costs and does not signal an improvement in end demand, so spreads remain weak. Third, anti-involution policies, capacity replacement ratios, ultra-low emission upgrades, and energy- and carbon-regulation will gradually impose supply constraints, but the execution pace may be slower than the last supply-side reform cycle. Fourth, margins across the industry are likely to stay near multi-year lows for most of 2026, with visible supply contraction expected to start in 2H26 and become more influential in 2027 as carbon trading and emissions constraints widen. Fifth, valuations of the covered companies already reflect part of the positive outlook, while the near-term demand backdrop remains weak, so Hold is maintained.

Analysis framework

The report combines a top-down industry supply-demand framework with a bottom-up company valuation approach. At the industry level, it analyzes crude steel production, finished steel consumption, property and infrastructure demand, exports, raw material costs, policy constraints, and the pace of carbon-emissions regulation; at the company level, it compares 1Q performance, earnings forecast revisions, P/B valuation multiples, target price changes, and upside/downside risks for Angang, Maanshan, and China Steel Corp.

Methodology notes

• Industry supply-demand analysisSteel supply-demand balance sheet

  Judges how tight or loose the industry is by looking at crude steel output, finished steel consumption, apparent consumption, exports, and the surplus.

  The report expects China's crude steel output to fall from 1,029Mt in 2023 to 886Mt in 2028e, and finished steel consumption to fall from 905Mt in 2023 to 738Mt in 2027e-2028e; a surplus remains but gradually narrows.

• Policy cycle analysisAnti-involution and carbon-constraint implementation cycle

  Splits the policy impact into four stages: policy signal, compliance execution, inspection and correction, and structural enforcement.

  2025 is the policy-signal phase; 1H26 is mainly about compliance with emission upgrades; inspections and audits in 2H26 may trigger effective capacity contraction; after 2027, expanded carbon-emissions control and trading will pressure high-emission, high-cost capacity.

• Valuation methodTarget P/B valuation

  Derives target prices by multiplying target price-to-book ratios by forecast book value per share, then incorporating exchange-rate forecasts.

  The report generally uses lower or unchanged target P/B multiples for covered companies to reflect weak demand, slow earnings recovery, and margin pressure in the near to medium term.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Angang-H/A (347 HK/000898 CH)

  Covered company, Hold maintained and target price lowered.

  Strengths

  Low valuation, and if supply contraction and the macro environment improve, a small profit could be restored in 2027.

  Weaknesses

  Net losses are expected to continue in 2026, earnings forecasts were cut sharply, and margins are pressured by weak demand and oversupply.

  Comparison

  Weaker than Maanshan; the H-share target price of HKD1.65 and A-share target price of RMB2.60 imply about 12%-15% upside.

  Risks

  Higher-than-expected raw material costs, weaker-than-expected steel prices, new capacity added through capacity replacement, and slower supply-side controls.

• Maanshan-H/A (323 HK/600808 CH)

  Covered company, Hold maintained and target price lowered.

  Strengths

  Benefits from Baowu system support, operating efficiency, cost advantages, and a better product mix, and is still expected to remain profitable in 2026.

  Weaknesses

  Weak industry demand and margin pressure led to 66%/15% cuts in 2026/27 net profit forecasts.

  Comparison

  Relatively more resilient among the covered companies; the H-share target price of HKD2.60 implies about 1% downside, while the A-share target price of RMB3.90 implies about 5% upside.

  Risks

  Valuation already reflects a lot of positive expectations; if demand stays weak, raw materials rise, or policy execution is delayed, earnings recovery may fall short of expectations.

• China Steel Corp (2002 TT)

  Covered company, Hold maintained and target price lowered.

  Strengths

  If steel prices rise materially, earnings are highly sensitive to price improvement; the recent ASP increase helps narrow losses.

  Weaknesses

  Losses have continued for multiple quarters since 2Q25, with 1Q26 net loss of about TWD2.5bn; weak mainland China steel prices and strong exports continue to weigh on the Taiwan market.

  Comparison

  Target price is TWD18.9, implying about 2% upside; it is heavily affected by spillover from structural issues in mainland China steel.

  Risks

  Higher-than-expected raw material costs, lower-than-expected steel prices, aggressive pricing by mainland steelmakers seeking to boost exports, and intensified product competition.

• China steel industry

  Industry research subject, with a focus on supply-demand, policy, and margin turning points.

  Strengths

  Anti-involution, ultra-low emissions, carbon trading, and compliance supervision should gradually reduce inefficient capacity and improve discipline over the long term.

  Weaknesses

  Weak property and infrastructure demand, with exports able to offset only part of the pressure; oversupply and low margins persist.

  Comparison

  This round of adjustment is slower and more market-oriented than the 2016 supply-side reform, and is unlikely to produce a strong near-term rebound.

  Risks

  Policy implementation slippage, geopolitical disruptions, weaker macro demand, rising trade barriers, and persistently high raw material costs.

Key data

• 1Q26 crude steel outputdown 4.6% YoYThe decline was mainly driven by weak demand rather than proactive supply-side rebalancing.
• Property new startsdown about 20% YoY in 1Q26Property activity continues to be a key drag on steel demand.
• Year-to-date exportsdown about 10% YoYAffected by new export licensing requirements and disruptions related to the Strait of Hormuz, though full-year exports are still expected to remain relatively resilient.
• Recent steel price moveup about RMB200/ton over the past two monthsThe increase was mainly driven by rising iron ore and coking coal costs, not an improvement in end demand.
• Iron ore pricesabout USD110/tonAbove the 2025 average of about USD100/ton.
• China coking coal pricesabout RMB1,600/tonAbove the 2025 average of about RMB1,400/ton.
• Angang 1Q26 net lossRMB1.5bnHSBC expects Angang's 2026 net loss to be about RMB4.5bn, with a return to a small profit only in 2027.
• Maanshan 1Q26 net profitRMB42mThe best performer among covered names, supported by Baowu system backing, cost advantages, and product mix.
• China Steel Corp 1Q26 net lossTWD2.5bnWeaker steel prices and higher input costs offset the benefit of higher average selling prices.
• Coverage ratingsAll maintained at HoldThe report cuts earnings estimates and target prices to reflect the slower recovery path.

Impact & implications

The investment implication is that investors should not bet on a rapid demand-led rebound in the steel sector in the short term. Opportunities are more likely to come from policy discipline, environmental compliance, and carbon constraints that drive supply-side cleanup. Large, compliant steelmakers with cost advantages and strong high-end product capabilities are likely to benefit in the long run, while small steel mills with high costs, high emissions, and weak funding capacity will face greater elimination pressure. For investors, valuation rerating will require clearer signs of mandatory output cuts, stronger property and infrastructure demand, a better export environment, or lower raw material costs.

Risks

• Supply-side control measures may be insufficiently clear or implemented later than expected, delaying the margin turning point.
• Property new starts and infrastructure demand may continue to underperform expectations, causing steel end-demand to weaken further.
• Raw material costs such as iron ore and coking coal may be higher than expected, squeezing steelmakers' spreads.
• Steel prices may fall below expectations due to weak demand and ample supply.
• New capacity created through capacity replacement may exceed expectations, offsetting the effect of policy-driven cleanup.
• Export licensing, trade protection, anti-dumping measures, and geopolitical disruptions may weaken the export buffer.
• Rising carbon-control and environmental compliance costs will pressure high-cost steel mills, while also increasing operating costs in the short term.

What to watch

• Whether inspections, output audits, and compliance corrections in 2H26 translate into real and effective capacity contraction.
• The timetable and enforcement intensity for expanding national carbon-emissions controls and carbon trading to the steel industry.
• Whether property new starts, infrastructure investment, and manufacturing steel demand show marginal improvement.
• Changes in steel export licensing, Southeast Asian tariffs, and global trade protection policies.
• The trends in iron ore and coking coal prices, and whether the increase in steel prices can outpace rising costs.
• The pace at which Angang, Maanshan, and China Steel Corp narrow losses or restore profitability in subsequent quarters.
• Whether more explicit mandatory output cuts, tighter capacity replacement rules, or exit policies for outdated capacity emerge.