􀂄 A more comprehensive reality check along the food chain
We embarked on a four-day field trip in mid-September across Shandong, Hebei
and Shanxi provinces and Beijing. Our meetings with a port operator, an iron ore
trader, two steel and coal industry consultants, a small iron ore mine, a small mill,
and a coal mine company, provided us with a more comprehensive perspective. We
observe uncertainty along the food chain, except in coking coal.
􀂄 Steelmakers: caught in the middle
Mills in China have to deal with rising price volatility, due to varied demand,
swings in supply, and re/de-stocking by traders, among other factors. On exports,
we find demand at the destination is more critical than price parity, which is also
beyond the control of mills. Additionally, we expect the hot rolled coil (HRC)
price to rise 9% to Rmb3,372/t because of higher input costs in 2010.
􀂄 Raw material suppliers: better positioned
We find the supply overhang, which often troubles steelmakers, is of less concern
to many raw material suppliers. Tightening regulation, more consolidation and the
closure of small coal mines are particularly favourable to large coking coal
producers. In iron ore, fragmented domestic supply and rising costs should
continue to sustain demand for imported ore, in our view.
􀂄 Stock picks: Baosteel and CMR most preferred, Wuhan least preferred
We expect mini-cycles along the price uptrend in 2010. The likelihood of earnings
visibility and potential upside surprise is higher for upstream suppliers than
steelmakers. UBS favours coking coal and iron ore globally. Of the steel stocks in
China, we prefer Baosteel and China Metal Recycling (CMR) to Wuhan Steel.