The iron ore negotiations are nearing completion and Vale proposes a 90%-100% increase, which will undoubtedly increase the cost pressures of steel mills. Domestic steel prices have risen sharply in recent weeks, reflecting that steel companies have begun to shift costs downstream. As an important downstream of steel, the cost of the machinery industry is of concern.
CICC believes that the increase in steel prices has a double impact on the machinery industry. On the one hand, the rise in steel prices directly squeezes the profit rate of the machinery industry; on the other hand, the period of rising steel prices is accompanied by the better downstream demand of the machinery industry. Therefore, the rise in steel prices does not mean that the mechanical industry's profit margins decline.
Overall, the cost of steel in the cost structure of the machinery industry accounts for 6% (excluding finished steel products such as castings and forgings, parts, and semi-finished products, which only refer to the direct steel purchase cost). In terms of the molecular industry, the cost of steel for containers and ships accounted for the largest proportion, followed by heavy machinery, machine tools, construction machinery, and port machinery. The railway equipment steel accounted for a relatively small proportion.
According to historical experience, in the cycle of falling profit margins, for every 10% increase in steel prices, the profit margin of the machinery industry will drop by 0.64 percentage points. Among them, the profit margins of the sub-industries such as instrumentation, construction machinery, internal combustion engines, general petrochemicals, machine tools, etc. have fallen significantly. However, the profit margins of sub-sectors such as agricultural machinery, cultural office supplies, etc. decreased slightly.
Although steel is a raw material for the machinery industry on the one hand, the increase in steel prices directly affects the cost of the machinery industry; at the same time, however, the rise and fall of steel prices is also a direct reflection of the degree of economic prosperity. From the perspective of the downstream demand structure of the steel industry, real estate, infrastructure and machinery, household appliances, automobiles, and shipping are the major sources of demand. If the demand-driven steel price rises, it reflects the increase in the degree of prosperity of related downstream industries, and the prosperity of these industries will directly lead to engineering machinery, machine tools, metallurgical equipment, parts and components, instrumentation and other machinery industries. Therefore, the period of rising steel prices may also be a good period for the downstream demand of the machinery industry.
CICC pointed out that the rise in steel prices in different periods has different effects on the profitability and stock prices of the machinery industry. In the recovery stage of the industry, the moderate increase in steel prices means the recovery of downstream demand, the economies of scale bring about an increase in industry profitability, and the movement of the mechanical sector is basically synchronized or outperform the market. At the peak of the prosperity of the machinery industry, steel prices are often subject to regulatory pressure, and the machinery industry will often underperform the broader market. Judging from the characteristics of the steel price (ordinary plate) in the previous cycle, steel prices fluctuate below 5,000 yuan/ton (equivalent to the level in 2007), and the profit margin of the machinery industry will not be affected to over 5000 yuan. Yuan/ton, the profit rate will have a greater negative impact, and the stock price will also be negatively affected.
Looking ahead to 2010, the impact of rising steel prices on the profitability of the machinery industry is limited. In 2010, steel prices were mainly below 5,000 yuan/ton. In addition, China's machinery industry has not yet reached the peak period of the economy, and the space for scale effect still exists. The machinery industry still has good performance.
In addition, Industrial Securities stated that currently listed companies in the machinery industry have basically learned lessons from 2008 and have started to reserve steel at low levels. Therefore, this year's rise in steel prices has not eroded the profits of the industry. At the same time, the corresponding product loaders have already raised their prices, and excavators are ready to increase their prices. In the context of good demand, the machinery industry has no fear of the impact of rising steel prices.
CICC believes that the increase in steel prices has a double impact on the machinery industry. On the one hand, the rise in steel prices directly squeezes the profit rate of the machinery industry; on the other hand, the period of rising steel prices is accompanied by the better downstream demand of the machinery industry. Therefore, the rise in steel prices does not mean that the mechanical industry's profit margins decline.
Overall, the cost of steel in the cost structure of the machinery industry accounts for 6% (excluding finished steel products such as castings and forgings, parts, and semi-finished products, which only refer to the direct steel purchase cost). In terms of the molecular industry, the cost of steel for containers and ships accounted for the largest proportion, followed by heavy machinery, machine tools, construction machinery, and port machinery. The railway equipment steel accounted for a relatively small proportion.
According to historical experience, in the cycle of falling profit margins, for every 10% increase in steel prices, the profit margin of the machinery industry will drop by 0.64 percentage points. Among them, the profit margins of the sub-industries such as instrumentation, construction machinery, internal combustion engines, general petrochemicals, machine tools, etc. have fallen significantly. However, the profit margins of sub-sectors such as agricultural machinery, cultural office supplies, etc. decreased slightly.
Although steel is a raw material for the machinery industry on the one hand, the increase in steel prices directly affects the cost of the machinery industry; at the same time, however, the rise and fall of steel prices is also a direct reflection of the degree of economic prosperity. From the perspective of the downstream demand structure of the steel industry, real estate, infrastructure and machinery, household appliances, automobiles, and shipping are the major sources of demand. If the demand-driven steel price rises, it reflects the increase in the degree of prosperity of related downstream industries, and the prosperity of these industries will directly lead to engineering machinery, machine tools, metallurgical equipment, parts and components, instrumentation and other machinery industries. Therefore, the period of rising steel prices may also be a good period for the downstream demand of the machinery industry.
CICC pointed out that the rise in steel prices in different periods has different effects on the profitability and stock prices of the machinery industry. In the recovery stage of the industry, the moderate increase in steel prices means the recovery of downstream demand, the economies of scale bring about an increase in industry profitability, and the movement of the mechanical sector is basically synchronized or outperform the market. At the peak of the prosperity of the machinery industry, steel prices are often subject to regulatory pressure, and the machinery industry will often underperform the broader market. Judging from the characteristics of the steel price (ordinary plate) in the previous cycle, steel prices fluctuate below 5,000 yuan/ton (equivalent to the level in 2007), and the profit margin of the machinery industry will not be affected to over 5000 yuan. Yuan/ton, the profit rate will have a greater negative impact, and the stock price will also be negatively affected.
Looking ahead to 2010, the impact of rising steel prices on the profitability of the machinery industry is limited. In 2010, steel prices were mainly below 5,000 yuan/ton. In addition, China's machinery industry has not yet reached the peak period of the economy, and the space for scale effect still exists. The machinery industry still has good performance.
In addition, Industrial Securities stated that currently listed companies in the machinery industry have basically learned lessons from 2008 and have started to reserve steel at low levels. Therefore, this year's rise in steel prices has not eroded the profits of the industry. At the same time, the corresponding product loaders have already raised their prices, and excavators are ready to increase their prices. In the context of good demand, the machinery industry has no fear of the impact of rising steel prices.
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