China Steel Sector
14  Feb. 2014
Late January steel output softens
China's steel output in late January softened to 717Mt (732Mt in mid
January). In the near term, output should remain restrained by tight liquidity
and pollution controls, while demand has yet to return post Chinese New
Year. While rising spot cash spreads are positive, growing inventories have
caused us to remain cautious - Baosteel is now our preferred sector exposure.
 China steel output declined 2% to 717Mtpa. According to China Iron &
Steel Association (CISA), crude steel output for the last 10 days in January
declined 2% to 1.96Mt (or 717Mt annualized) from 2.00Mtpa (or 732Mt
annualized) in mid Jan. This was driven by production cuts in large and mid
sized mills (CISA members) by 2.6% to 1.66Mt or 606Mt (1.70Mtpa or
622Mtpa in mid Jan). In contrast, small mills (<3Mtpa capacity) kept output
steady at 0.31Mtpd or 111Mtpa (unchanged from in mid Jan). For 2014, we
forecast total crude steel output of 814Mt (+5 yoy, versus 2013: 774Mt),
slightly ahead of CISA forecast of 810Mt.
 Steel and iron ore stockpiles above trend levels. Steel inventories with
traders jumped to 17.7Mt (15.6Mt in mid-Jan) and producer stocks also
edged higher to 13.6Mt (13.0Mt in mid-Jan). Together, we estimate CISA
mills and traders now hold 20.4 days, 3.7 days higher than mid-Jan and
historical level of 17 days in Jan-Feb period in the past 5 years. On the raw
materials side, mid January iron ore stocks at Chinese mills stood at 30.1
days (c31.5 days in early January), above historical levels of 28.5 days but
below January levels of 35 days over the past 3 years. However, current iron
ore stocks at Chinese ports have risen to 94.3Mt from 89.8Mt in late-
January, supporting c32 days of steel output (historical average of c28 days),
by our estimates. That said, with seaborne ore currently 9% below domestic
(Tanshan) prices, we expect support for imports to remain.
 Industry sentiment turns negative albeit cash spreads recovering.
Sentiment amongst steel mills and traders slipped back into negative
territory along with weak spot markets, while demand has yet to return post
Chinese New Year (CNY). However, lower raw material costs have helped
lift spot margins with HRC cash spreads advancing further to Rmb1,503/t
(from Rmb1,477/t in late Jan) and rebar cash spreads up to Rmb1,434/t
(versus Rmb1,428/t in late Jan). With steel inventories now above historical
Jan-Feb levels, we turn more cautious on the sector as we await demand to
return post CNY. We recently cut Angang to N (from OW) following a
disappointing FY13 profit alert. Baosteel is now our preferred exposure.