Pan Asia: Steel
Nascent rally in Asian steel stocks could continue for a while
Maintaining constructive sector view despite recent rally
Asian spot steel prices have breached a psychologically important
threshold of US$1,000/t (up 45% ytd), putting them in uncharted territory.
Given the strength that we have already seen ytd, we expect regional spot
prices to rise 50% yoy, on average.
We believe that the recent rise in oil prices (and our bullish view on oil) – which
are positively correlated to steel prices – also creates more upside risk to Asian
steel prices. Near-term pricing support could also come from the possible
shutting down of plants (according to SBB) near Beijing ahead of the Olympics.
As spot steel prices – leading indicators of contract prices – have been the
main driver of Asian steel stocks, we believe that the nascent rally in Asian
steel stocks could continue for a while, especially if some expected supplyside
disruptions occur. Many of the expected negative catalysts (e.g., hikes in
material costs) have now been delivered to the market, and are priced into
current valuations, in our view.
Costs have also risen dramatically this year, and we believe the average
cash cost of production will rise 45% yoy in 2008 for major Asian
steelmakers. Some companies will be more successful than others in
offsetting these costs through price hikes. We note that regulatory action has
already been initiated in certain markets, like India, to control steel prices.
Year to date, Asian steel stocks on average have underperformed their
respective home markets, and their US (by 36%) and EU (by 34%) peers. We
believe that this relative underperformance itself could prove a catalyst, as
Asian steel stocks play catch-up with their global peers. Asian steel valuations,
which were at a huge premium to their global peers’ at the start of the year, are
more reasonable at present following the recent underperformance.
Catalysts and risks
We see upcoming contract price announcements for 3Q contract steel prices
and rise in Asian spot prices as catalysts for Asian stocks under our coverage.
Risks: fall in spot prices, FX changes, regulatory action and material costs.
Our best ideas: Buy Maanshan, Tata Steel, JSPL; short HSC
Our top Buy ideas come from China and India: Maanshan (0323.HK, Conviction
list), with 18% potential upside, Tata Steel (TISC.BO), JSPL (JNSP.BO) and
Angang (0347.HK). OneSteel (OST.AX) is our top pick in Australia. Hyundai
Steel (004020.KS) remains our top Sell-rated stock.

Table of contents
Overview: Expect nascent rally to continue 3
Steel stock drivers look positive 5
Global steel stock rally had bypassed Asia – until now 8
China: Supply constraints, low prices create upside risk to prices 10
India: Regulatory overhang creates opportunities 12
Japan: Strong contract pricing achieved for FY2008 14
Korea: Flat prices are already at a discount to regional prices 14
Taiwan: Highest domestic spot prices in the region 15
Australia: High iron ore to assist OneSteel 15
United States: Scrap has sent prices to a record high 16
Europe: Imports may be required for market balance 17
Brazil: Rising incomes leading to higher steel demand 19
Steel price trends 20
China data 22
Angang Steel (Buy): National champion with strong catalysts 24
Maanshan Iron & Steel (Buy): Earnings momentum picking up 26
Jindal Steel and Power (Buy): A powerful steel company 28
Tata Steel (Buy): A great vehicle to play the current steel cycle 30
Bluescope Steel Ltd (Hold): underpinned by continued HRC strength 32
OneSteel Ltd (Hold): Short-term pain before medium/long-term gain 34
Goldman Sachs JBWere Disclosures 36
D isclosures 39