**Investment Highlights**
The machinery industry is experiencing a mix of opportunities and challenges. On the positive side, the government is planning to set up an industrial development fund aimed at revitalizing the equipment manufacturing sector, signaling continued support for the industry. However, there are concerns as well—rising international iron ore prices have led to significant price hikes by major domestic steel producers like Baosteel, which in turn has put pressure on the profit margins of machinery companies.
Despite these short-term challenges, the long-term outlook for the machinery sector remains positive. The increase in steel prices can be viewed as part of a broader asset revaluation process. While it may temporarily reduce profit margins, this shift could also mark a turning point in the industry’s development model, pushing companies toward more efficient and sustainable practices. For investors, focusing on firms with strong cost management capabilities is advisable.
Looking at the construction machinery sector, import and export data show that domestic products are gaining competitiveness. This suggests a promising future for Chinese companies in overseas markets. Even with rising steel prices, we recommend paying close attention to Sany Heavy Industry and Zoomlion, based on their strong gross profit margins, competitive positioning, and overall valuation.
In the machine tool industry, import substitution remains a key investment theme. High demand from downstream sectors has created a shortage of high-end CNC machines, giving manufacturers strong pricing power. These companies can pass on rising costs to customers, making them attractive investments. Kunming Machine Tools is one such company worth considering.
**Risk Factors**: Investors should remain cautious about broader market risks, potential tightening of macroeconomic policies, the appreciation of the RMB, and ongoing increases in raw material prices—particularly steel. These factors could pose challenges for the industry’s growth.
**Government Support for Industrial Development**
Recent announcements from the National Development and Reform Commission (NDRC) indicate a renewed focus on supporting the equipment manufacturing sector. Li Ye, director of the NDRC’s Office of Major Technical Equipment Coordination, mentioned that the commission is working with the China Development Bank to establish an industrial development fund. The technical plan is already in place, pending final approval from the state.
Additionally, the NDRC released the “Special Plan for Major Technical Equipment Development and Major Industrial Technology Development during the 11th Five-Year Period.†This plan outlines efforts to develop eight key pieces of equipment and master four core technologies, aiming to reduce reliance on foreign technology and promote industrial upgrading by the end of the 11th Five-Year period.
**Rising Steel Prices Impact Profitability**
Baosteel recently reached an agreement with Brazil’s CVRD on the 2008 iron ore benchmark price, leading to a 65% increase in Brazilian iron ore prices. Following this, Baosteel significantly raised its steel prices in Q2, with hot-rolled, cold-rolled, and heavy plates increasing by RMB 800 per ton. These price hikes far exceeded cost increases, and due to Baosteel’s market influence, they have further driven up domestic steel spot prices.
As steel is a major cost component for machinery firms, rising prices are putting pressure on the entire industry, squeezing profit margins. While high-value-added companies with strong gross margins are less affected, those in highly competitive markets or engaged in price wars face greater challenges.
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