Above-target cost reductions remain insufficient to offset the narrowing CRC spread; Neutral rating maintained on Baosteel

Overview

This report summarizes the key takeaways from Baosteel's 1H26 analyst briefing on August 24. JPMorgan recognizes the company's above-target cost reductions, operating efficiency, and capabilities in high-end products, but believes its CRC product mix, blast furnace maintenance, export barriers, and weak industry demand will continue to constrain near-term margin recovery, and therefore maintains its Neutral rating and Rmb6.00 target price.

Core views

Baosteel held an analyst briefing on August 24, after reporting results in line with expectations on August 21. JPMorgan believes the weakness in 2Q26 was primarily due to a mismatch between market conditions and the company's product mix, which is skewed toward cold-rolled coil (CRC). Hot-rolled coil (HRC), pipes, and long products improved, but prices declined for cold-rolled products such as automotive sheet, electrical steel, color-coated sheet, and tinplate, narrowing the HRC-CRC spread from the historical Rmb600-800/tonne to Rmb300-400/tonne. As a result, Baosteel was unable to fully benefit from the HRC upcycle. Meanwhile, the Baoshan base underwent approximately 90 days of maintenance in 1H26 and the Zhanjiang base approximately 30 days, mainly concentrated in 2Q26, further raising costs and depressing quarterly earnings. The company expects CRC margins to remain divergent in 2H26: automotive sheet may stabilize as demand recovers, while color-coated sheet and tinplate will continue to face pressure from supply-demand imbalances. Cost control was the main positive factor at the briefing. Despite rising raw material costs and the impact of maintenance, Baosteel reduced its cost per tonne of steel by more than Rmb150 in 1H26, significantly outperforming its previous target of Rmb100/tonne. Optimization of conventional ironmaking and steelmaking consumption and improvements in labor costs contributed more than 40% of the total savings; centralized procurement, supplier diversification, and material substitution delivered an additional cost reduction of more than Rmb20/tonne. Management views cost reduction as a long-term priority, but JPMorgan believes these improvements are not yet sufficient to fully offset the narrowing product spread and pressure on industry profitability. On demand, the company views 3Q26 as a seasonal trough and expects demand, particularly for CRC, may improve marginally from September to October. Automotive demand in 2H26 may achieve double-digit sequential growth, but could still decline year over year due to a high comparison base; shipbuilding remains the strongest demand highlight; overall electrical steel sales growth is expected to be limited, but ultra-thin and high-grade products may perform better. The export environment is becoming less favorable, as tighter EU import policies and South Korea's anti-dumping duties on Chinese HRC may create additional pressure on steel exports. JPMorgan's cautious view of the steel industry continues to depend on whether policies are substantively implemented, domestic demand can recover sustainably, and raw material costs can decline. Regarding domestic capacity expansion, the Ma'anshan project is a pipe production base with annual capacity of 1.1 million tonnes and an investment of less than Rmb5 billion, and is scheduled to reach full production by the end of 2027. Located at the Masteel base, the project can leverage local raw materials, logistics, and technical resources. After commissioning, the Baoshan base will cover pipes with diameters below 140 millimeters, Lubao will cover pipes above 460 millimeters, and Ma'anshan will cover medium-diameter pipes of 140-460 millimeters, thereby completing the full-size seamless steel pipe portfolio, expanding downstream coverage, and providing room for subsequent growth. Progress on overseas projects has been more cautious. After the Saudi joint venture was established, it encountered several obstacles: a surge in Chinese heavy plate exports caused local Saudi heavy plate prices to decline by approximately 30%, while the 15% import tariff remained insufficient to close the price gap between China and Saudi Arabia; geopolitical conflicts in the Middle East also altered key assumptions regarding capital expenditure, logistics, and infrastructure readiness. Baosteel has withdrawn the joint venture's personnel to China, retaining only routine communication with its partner, and stated that it would not rush into investment but would continue evaluating overseas projects using a dynamic profitability model. The project has therefore entered a "wait-and-see" phase. Cost pressure from the EU Carbon Border Adjustment Mechanism may gradually increase. Baosteel estimates that the initial carbon tariff impact will be approximately Rmb100-200/tonne, with costs potentially rising significantly as the taxable scope expands to all carbon emissions in the 2030s. However, the EU's implementation schedule and specific calculation methodology remain uncertain, and management believes overly aggressive implementation could suppress the real economy and weaken EU competitiveness. The company is communicating with the EU in the hope that it will review Baosteel's carbon system and accept the company's independently developed full-process carbon accounting data; if accepted, future carbon tariff pressure could be substantially reduced, with the final outcome unlikely to become clear until next year. JPMorgan adjusted its model based on management's latest guidance: it raised steel price assumptions, increased input cost assumptions including coking coal and iron ore, lowered unit labor cost assumptions, and updated volume forecasts. Following the adjustments, its 2026-28 earnings forecasts were cut by 2%-17%; specifically, 2026 adjusted EPS was reduced from Rmb0.49 to Rmb0.41, a decrease of 16.1%. The model forecasts FY26 revenue of Rmb320,140 million, adjusted net profit of Rmb8,990 million, and adjusted EPS of Rmb0.41, corresponding to year-over-year revenue growth of 0.8% and an EPS decline of 8.4%. Adjusted EPS is expected to recover to Rmb0.54 in FY27 and Rmb0.63 in FY28, representing year-over-year growth of 29.8% and 17.6%, respectively. Net debt is expected to fall from Rmb17,837 million in FY25 to Rmb9,228 million in FY26, Rmb5,303 million in FY27, and Rmb1,237 million in FY28. In terms of long-term competitiveness, Baosteel produced 51 million tonnes of crude steel in 2025, accounting for approximately 5% of China's total output, from four bases in Shanghai, Nanjing, Wuhan, and Zhanjiang, making it the world's second-largest steel producer. JPMorgan believes Baosteel is the best-managed steel company and the only one that remains profitable in a low-margin, weak-demand environment. Its advantages stem from higher operating standards and efficiency, continued investment in high-end products such as electrical steel, and a strong track record of corporate actions supported by the Baowu Group. However, the recovery in steel margins is still expected to be moderate over the next several quarters, limiting rating upside. On valuation, JPMorgan maintains its December 2027 target price of Rmb6.00, based on a target price-to-book ratio of 0.6x, one standard deviation below the historical average. Its steel stock valuation methodology compares forward ROE with historical price-to-book ratios and then adjusts for company-specific factors; the method is intended to reflect changes in earnings while avoiding sharp valuation multiple fluctuations caused by the steel cycle. DCF valuation is used as a cross-check from a cash flow perspective. The base-case view remains Neutral, with explicit downside scenarios including raw material price increases exceeding expectations and further economic weakness; upside scenarios include production cuts or fiscal and monetary stimulus driving a faster recovery in steel margins, as well as stronger-than-expected economic conditions.

Analysis framework

JPMorgan first used management's briefing to break down the product-mix and maintenance factors behind the weakness in 2Q26 profit, and then assessed cost-reduction achievements, demand by product in 2H26, export policies, the new domestic project, the Saudi project, and the EU carbon tariff. It subsequently incorporated the latest guidance on steel prices, sales volumes, coking coal, iron ore, and labor costs into its 2026-28 financial model, determined the target price using a target P/BV based on forward ROE and historical price-to-book ratios, and used DCF as a cash flow cross-check.

Methodology notes

• Valuation methodologyPB valuation

  Benchmarking forward ROE against historical price-to-book ratios

  The report compares the company's forward ROE with historical P/BV levels and adjusts for company-specific considerations, ultimately applying a target P/BV of 0.6x; this method is used to incorporate earnings changes while reducing multiple volatility caused by the steel cycle.

• Valuation methodologyDCF discounted cash flow

  DCF cross-check

  The report uses discounted cash flow valuation to review the P/BV valuation result from a cash flow perspective, rather than using DCF as the primary target-price methodology.

• Industry analysis frameworkVolume-price decomposition

  Decomposition of steel price, sales volume, and unit cost assumptions

  The report separately adjusts steel prices, sales volumes, coking coal and iron ore input costs, and unit labor costs to identify the impact of each variable on the 2026-28 earnings forecasts.

• Industry analysis frameworkSupply-demand framework

  Supply-demand and spread analysis by product

  The report assesses the pace of steel margin recovery through the HRC-CRC spread, supply-demand differences between automotive sheet and other cold-rolled products, export barriers, and production-cut policies.

• Quantitative/factor/portfolio theoryStyle factor analysis

  Value, growth, momentum, quality, and low-volatility style exposures

  The report presents Baosteel's current and historical rankings across quantitative styles including value, growth, momentum, quality, and low volatility, and provides correlations with market, regional, macro, and style factors to supplement the description of the stock's characteristics.

Asset mapping & comparison

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

• Baosteel A-shares (600019.SS; 600019 CH)

  The report considers the company a steel enterprise with strong operating efficiency and earnings resilience in a low-margin industry environment, although near-term returns remain constrained by CRC prices, maintenance, and weak industry demand.

  Strengths

  High operating standards and efficiency; reduction in cost per tonne of steel exceeded the target in 1H26; continued development of high-end products such as electrical steel; a strong track record of corporate actions supported by the Baowu Group; the Ma'anshan project will complete full-size coverage of seamless pipes.

  Weaknesses

  The CRC-heavy product mix did not fully benefit from the HRC upcycle, and the HRC/CRC spread narrowed significantly; blast furnace maintenance increased costs; the near-term recovery in steel margins may remain weak.

  Comparison

  JPMorgan describes Baosteel as the best-managed steel company and believes it is the only steel enterprise that remains profitable in the current low-margin, weak-demand environment.

  Risks

  Raw material cost increases exceeding expectations, further economic weakness, tighter export policies, EU carbon tariffs, and deterioration in the economics of overseas projects.

Key data

• Current share priceRmb5.86As of August 24, 2026
• Target priceRmb6.00December 2027 target price, unchanged
• Target price-to-book ratio0.6xOne standard deviation below the historical average
• HRC/CRC spreadRmb300-400/tonneHistorical level was Rmb600-800/tonne
• 1H26 reduction in cost per tonne of steelMore than Rmb150/tonneExceeded the previous target of Rmb100/tonne
• Contribution from fundamental cost optimizationMore than 40%Share of total cost savings from conventional ironmaking and steelmaking consumption and labor optimization
• Cost reduction from procurement and material substitutionMore than Rmb20/tonneFrom centralized procurement, supplier diversification, and material substitution
• Blast furnace maintenance durationBaoshan approximately 90 days; Zhanjiang approximately 30 daysBoth in 1H26, mainly concentrated in 2Q26
• Ma'anshan project capacity1.1 million tonnes/yearPipe production base scheduled to reach full production by the end of 2027
• Ma'anshan project investmentLess than Rmb5 billionLeveraging the raw materials, logistics, and technical resources of the Masteel base
• Change in Saudi heavy plate pricesApproximately -30%Local prices declined after an increase in Chinese heavy plate exports
• Saudi import tariff15%Still insufficient to offset the price gap between China and Saudi Arabia
• Initial impact of EU carbon tariffApproximately Rmb100-200/tonneUncertainty remains regarding the implementation schedule and calculation methodology
• 2026 adjusted EPS revisionReduced from Rmb0.49 to Rmb0.41Cut by 16.1%
• 2026-28 earnings forecast revisions-2% to -17%Incorporating the latest assumptions for steel prices, sales volumes, raw materials, and labor costs
• Adjusted EPS forecastsFY26E Rmb0.41; FY27E Rmb0.54; FY28E Rmb0.63Corresponding year-over-year growth rates of -8.4%, 29.8%, and 17.6%
• Revenue forecastsFY26E Rmb320,140 million; FY27E Rmb321,509 million; FY28E Rmb325,375 millionCorresponding year-over-year growth of 0.8%, 0.4%, and 1.2%
• Adjusted net profit forecastsFY26E Rmb8,990 million; FY27E Rmb11,665 million; FY28E Rmb13,721 millionFY25 actual was Rmb9,903 million
• ROE forecastsFY26E 4.3%; FY27E 5.6%; FY28E 6.5%FY25 actual was 4.9%
• Net debt forecastsFY26E Rmb9,228 million; FY27E Rmb5,303 million; FY28E Rmb1,237 millionFY25 actual was Rmb17,837 million
• 2025 crude steel output51 million tonnesApproximately 5% of China's total output

Impact & implications

The report believes that above-target cost reductions, high-end electrical steel capabilities, and a comprehensive pipe portfolio will help Baosteel maintain a relative industry advantage, but the narrowing CRC spread, maintenance, export restrictions, and raw material costs continue to suppress near-term earnings. The Ma'anshan project provides room for medium-term product expansion, while the Saudi project and EU carbon tariff increase uncertainty surrounding overseas development; JPMorgan maintains its Neutral view until steel margins demonstrate a sustained recovery.

Risks

• Higher-than-expected increases in raw material costs could further compress steel margins.
• Further economic weakness could weigh on domestic steel demand and prices.
• Tighter EU import policies and South Korea's anti-dumping duties on Chinese HRC could increase export pressure.
• The scope, timing, and calculation methodology of the EU carbon tariff remain uncertain; the initial cost impact is expected to be approximately Rmb100-200/tonne and could increase significantly in the 2030s.
• The Saudi project faces declining local heavy plate prices, insufficient tariff protection, geopolitical conflicts, and changes in assumptions regarding capital expenditure, logistics, and infrastructure.
• Upside risks relative to the base-case scenario include production cuts or fiscal and monetary stimulus driving a faster recovery in steel margins, as well as better-than-expected economic performance.

What to watch

• Monitor whether steel demand improves marginally from September to October as management expects.
• Monitor whether automotive steel demand can achieve double-digit sequential growth in 2H26 and the extent of the year-over-year decline against a high base.
• Monitor whether shipbuilding demand can remain the strongest highlight.
• Monitor whether ultra-thin and high-grade electrical steel can continue to outperform amid moderate overall sales growth.
• Monitor whether policies are substantively implemented, domestic demand can recover sustainably, and input costs such as coking coal and iron ore can decline.
• Monitor whether the Ma'anshan 1.1 million-tonne-per-year pipe project can reach full production by the end of 2027.
• Monitor the dynamic profitability assessment of the Saudi project and whether the economic conditions for resuming investment are met.
• Monitor whether the EU accepts Baosteel's full-process carbon accounting data and the carbon tariff calculation outcome expected to become clear next year.