Goldman Sachs discusses "anti-involution": profits in the steel and cement industries are expected to improve
Goldman Sachs believes that the Central Financial Committee's meeting first mentioned the governance of "excessive competition" among enterprises, marking an upgrade in the "anti-involution" policy. The steel industry's plan to reduce production by 50 million tons is expected to accelerate, with production potentially decreasing by 6% in the second half of the year and profit margins possibly expanding by 200 yuan/ton; the cement industry faces elimination of about 22-27% of excess capacity. The policy shift towards long-term capacity reduction will drive continuous improvement in industry profits
"Anti-involution" is underway, and profits in the steel and cement industries are expected to improve.
According to news from the Chasing Wind Trading Desk, a research report released by Goldman Sachs on July 5 indicated that the sixth meeting of the Central Financial Committee held on July 1 sent important policy signals, clearly proposing the development of a "unified large market" and for the first time explicitly mentioning the issue of price declines caused by "excessive competition" among enterprises.
According to recent reports from The Paper, the sixth meeting of the Central Financial Committee held on July 1 deployed efforts to promote the construction of a nationwide unified large market. The meeting emphasized that to deepen the construction of a nationwide unified large market, it is necessary to focus on key difficulties, govern low-price and disorderly competition among enterprises in accordance with laws and regulations, guide enterprises to improve product quality, and promote the orderly exit of backward production capacity. Zhong Huiyong, a deputy researcher at the China Development Research Institute, stated that the construction of a nationwide unified large market can govern "involution" through a market mechanism of "survival of the fittest." When local market barriers are broken, enterprises with innovative capabilities and effective cost control can better participate in market competition, which will squeeze the survival space of inefficient and low-quality enterprises, thereby promoting the orderly exit of backward production capacity.
As the issue of overcapacity may welcome a policy turning point, Goldman Sachs expects that China's steel industry’s plan to reduce production by 50 million tons is likely to accelerate execution, with production in the second half of the year expected to decline by 6% year-on-year, and unit profit margins expected to improve significantly. The cement industry’s capacity clearing process has begun, with an estimated 22-27% of excess capacity expected to be eliminated, leading to a significant rebound in industry profits.
Steel Industry: Acceleration of 50 Million Ton Production Cut Plan
Goldman Sachs expects that under the new policy environment, the probability of executing the previously set 50 million ton production cut plan in the steel industry has significantly increased. Although the allocation of targets to provincial levels has been confirmed, execution has lagged previously, partly because unit cash profits were positive.
If the production cut plan is executed starting in July, crude steel production in the second half of 2025 will be 12% lower than the average level in the first half, representing a 6% year-on-year decline, creating a significant supply gap during this period. Goldman Sachs pointed out that in a similar situation in the second half of 2021, there was nearly a 10% supply gap in the domestic steel market, leading to margin expansion and a decline in exports.
According to Goldman Sachs' calculations, the implied rebar price spread in futures prices indicates that steel profit margins are expected to expand by nearly 200 yuan/ton, with the probability of executing the production cut in steel at about 70%.
Cement Industry: Capacity Clearing Entering Substantial Phase
According to data from the China Cement Association, Goldman Sachs estimates that unauthorized excess clinker capacity exceeds 400 million tons, accounting for about 18% of the industry’s total capacity. In addition, based on minimum utilization rates and additional requirements for energy consumption intensity, another 277-377 million tons of capacity face exit pressure, accounting for 12-17% of industry capacity.
Goldman Sachs' research report shows that the potential closure of unauthorized capacity and high-energy-consuming category capacity may lead to a 22-27% reduction in capacity, increasing the industry capacity utilization rate from the current 50% to 70%, at which point the average gross profit is expected to rebound to 80 yuan/ton or higher
Key Shift in Policy Direction
According to a research report by Goldman Sachs, the statements from this meeting indicate that the policy focus is shifting from the previous short-term measures of "anti-involution" to a more fundamental capacity exit mechanism. Goldman Sachs pointed out that the supply-side policies over the past year have mainly focused on achieving short-term supply-demand rebalancing through production limits or price support, but this approach cannot promote a sustainable cyclical recovery and is usually detrimental to long-term supply integration.
Goldman Sachs analysts believe that the shift in policy direction from capacity control to capacity reduction is positive and is expected to bring sustainable profit improvements to related industries, rather than just short-term price support.
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