China Steel Sector
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China's steel output from large and medium-sized mills (CISA members) ticked
up0.2% to reach a new high of 670Mtpa in mid-June (from early-Junelevels of
669mtpa). With cash spreads at multi-year highs, supply now appears to  be
responding, signaling an emerging risk, particularly as we walk into the slower 3Q
demand  season.  Given cheap  valuations and  likely stronger  2Q  profits
(sequentially), we stay OW Baosteel and Maanshan.
 CISA output setsnew high of 670Mtpa.According to the China Iron & Steel
Association (CISA),  daily crude steel output from large  and mid-sized mills
(CISA’s 90 members) for the secondten days of June climbed0.2% toa new high
of1.84Mtpd or 670Mtpa (669Mt in early-June). CISA did notprovide an estimate
of national output, but assuming a similar rise of 0.2% for small mills (non-CISA), national output may have risen  to  850Mtpa (848Mtpa early-June).
Assuming a similar daily rate for June, China’s 1H14 crude output would be
+3.6% y/y, with apparent demand +2.4% y/y (5M14 +2.7% & +2.8%, respectively).
 Steel inventories  and iron  ore stockpiles fall. Steel inventories  with traders
declinedto 13.4Mt (13.8Mt in earlyJune), but producer stocks climbed to 15.1Mt
(from 14.8Mt in early June). Taken together, we estimate CISA mills and traders
now hold 13.2 days, down from 13.7days in early Juneand below historical levels
of 14.3days. On the raw materials side, early June iron ore stocks at Chinese mills
fell to 21.9days from 23.6days in early June (historically 28 days).  Iron ore
stocks at Chinese ports remained largely unchanged at record levels of 112.7Mt
(from 113.0Mt in early June), supporting c35days of steel output (at current
output rates, historical levels of c31 days), by our estimates. Meanwhile, domestic
iron ore utilization rates edged higherto 69% in mid-June (67% early Junebut 79-80% 4M14), but coking coal mines fellto 81% (82%in early June).
 Cash spreads fall as iron ore rebounds. Sentiment amongst steel mills and
traders weakened this weekassteel pricessoftened. Along with arebound in
iron ore prices, this led to a fall in cash spreads for HRC (to RMB1,802/t from
RMB1,840/t in early June) and rebar (to RMB1,560/t  (RMB1,605/t in early
June). Weak property indicators and May’s Steel PMI retreating below 50
remain headwinds, but low steel market inventories and elevated cash spreads
suggest  a  strong  sequential  lift  in  2Q14  profits. Whilewe see  risk  of
overproduction into  the  seasonally  weak 3Q,  given  attractive risk-reward
conditions, we stay OW on Maanshan and Baosteel.