China inventories peaking as output
slows, local demand and exports rise
􀀗 Upgrade FY10e steel prices and sector
EPS by 12% and 14%, respectively
􀀗 Selective opportunities emerge. Raise
Maanshan, our top pick, and Baosteel to
OW(V); CSC and NSC to N(V)
Improving outlook. Inventories have been rising in China
since early August, as supply has outpaced demand, driving
down domestic steel prices by 25%. We think this trend will
end by the end of the year as prices have fallen below the
average cost of production (cRMB3,400/t), which should
result in output cuts. At the same time, exports are rising
given China’s competitive prices and western world
restocking, while local demand remains robust.
Upgrade steel and earnings forecasts. Global steel prices
are likely to remain suppressed in the near term but we think
this will be temporary, given robust domestic demand in
China and rising regional consumption. For 2010e and
2011e, we raise steel price assumptions by 7% and 18%,
respectively, leading to EPS upgrades of c14% and c15%.
Correction provides opportunities – upgrade Maanshan
and Baosteel to OW(V). From recent peaks in early August,
Asian steel shares have underperformed, with falls averaging
21%. In our view, this correction provides an attractive reentry
point into the sector which offers better value than coal
or aluminium. We upgrade Maanshan, our top sector pick,
and Baosteel to OW(V) from N(V) and raise CSC and NSC
to N(V) from UW(V). On our revised FY10 NPAT
estimates, we are 75% above consensus for Maanshan and
20% above for Baosteel. With flat steel overcapacity in the
region, we remain UW(V) on Angang and JFE. We stay
N(V) on POSCO as we wait for a better entry point.
Catalysts. In the near term, negative catalysts such as
Baosteel’s 9-13% cut to November 2009 contract prices and
China’s full inventories will weigh on the sector. On the
positive side, the sector should be supported by stronger 3Q
results and the weaker USD.