Recent sector rebound looks premature,
recommend a defensive strategy
􀀗 Hefty output cuts should allow a more
rapid recovery but watch out for mid
year steel price falls from lower costs
􀀗 Downgrade Angang to UW (V) fr N (V),
cut China Steel Corp to N (V) fr OW (V),
keep Maanshan & Bluescope OW (V)
Waiting for demand to return, steel prices may not have
bottomed yet. Lack of demand and an aggressive
destocking cycle continue to dominate the Asian region.
While we wait for buyers to return, decisive and aggressive
output cuts are sowing the seeds for a more rapid recovery,
in our view. In the meantime, steel prices may not have
bottomed yet. Output cuts have pushed key raw material
inputs into surplus which we forecast will lead to iron ore
and coking coal contract prices falling by 30% and 60%
respectively. We expect steel mills to partly pass onto
customers these lower raw material costs from 2Q onwards.
Sector slides into 1H losses. Driven by a sharp contraction
in global steel demand of 6.8%, we now see Asian steel
prices falling by 44% in CY2009e. Lower input costs should
provide some relief, but we expect the sector to swing into
losses in 1H CY09. Earnings should improve in 2010e from
steel prices recovering and a further easing in costs. We have
downgraded EPS by 84% and 48% in 2009e and 2010e.
Value or value trap? Most stocks in our universe are now
trading at or below their book values and below replacement
costs. However, with most in the sector likely to report sharp
losses over the next two quarters, trough valuations will
likely be tested. While remaining defensive on the sector, we
recommend investors OW (V) Maanshan for leverage to
China’s fiscal stimulus initiative and UW (V) Angang.

Investment summary
􀀗 Sector locked in negative momentum mode - stay defensive
􀀗 Aggressive output cuts paving the way for faster recovery but
watch out for mid year fall in prices as lower costs kick in
􀀗 Downgrade Angang to UW (V) from N (V) and CSC to N (V) from
OW (V). Keep Maanshan and BlueScope at OW (V)

Gale force macro headwinds remain strongly in
place with a global inventory destocking cycle yet
to complete its course. China has been about the
only active market with speculative purchases
stirring a rebound in domestic steel prices, but we
expect this rally will fail as underlying demand
remains weak. We forecast global steel demand to
fall by 7.2% this year which should take capacity
utilization rates sharply down. While aggressive
production cuts may bring about a faster recovery,
sharply lower raw material costs will likely
pressure steel prices by mid year. Given this
outlook, the recent sector rebound looks
premature - we recommend a defensive strategy.
After suffering a collapse in demand in the
DecQ08 period, Asian steelmakers are bracing
themselves for more pain in the current quarter.
Already, Nippon Steel and JFE have indicated
that they will report MarQ09 losses, while
POSCO have indicated that Jan09 was close to
breakeven. We expect all stocks under our
coverage to swing into losses in 1H CY09.
Since their sharp falls to trough valuations during
the past quarter, the Asian steel sector has
rebounded strongly. HK-listed Maanshan and
Angang are more than double their recent lows,
while other regional names are up by +10-40%. In
our view, most stocks are now fairly valued given
the stage of the cycle that we are currently in. We
recommend a defensive strategy across the region,
and would highlight the ratings:
􀀗 China. Remain OW (V) Maanshan for its
leverage to China’s stimulus package, which
is largely aimed at infrastructure and railway
projects. We downgrade Angang to UW (V)
from N (V) as we believe it will struggle to
fill its new 5mt Bayuquan flat steel plant,
with 1H losses unlikely to be recovered by
2H. We believe Baosteel is fairly valued.
􀀗 Japan. High-end producers are facing a
harder time given the recession in key enduse
markets (autos and manufacturing) and a
strong JPY. We recently downgraded JFE
Holdings to N (V) from OW (V) but its share
buyback plan should enable it to outperform
Nippon Steel N (V).
􀀗 Asia ex Japan and China. POSCO, rated N
(V), is our preferred pick for high-end steel
exposure due to its increased competitiveness
from the sharp depreciation of the KRW. We
downgrade CSC to N (V) from OW (V) but
keep Bluecope Steel at OW (V).

目录

Investment summary 3
Global steel outlook - Little hope for H1 2009 5
Asia can’t save the world 6
Steel price may not have bottomed yet 7
Commodity and earnings revisions 8
Ratings, price targets and risks 9
Risks 14
HSBC global steel model 18
HSBC Asian steel model 19
Company Summary 21
POSCO 22
Nippon Steel 23
JFE Holdings 24
Baoshan Iron & Steel 25
China Steel Corp 26
Angang Steel 27
Maanshan Iron & Steel 28
BlueScope Steel 29
Regional Steel Statistics 31
China demand indicators 32
Regional crude steel production 34
Regional finished steel production and consumption growth35
Regional finished steel trade 36
Regional steel prices 37
Regional steel inventories 39
Steel making raw materials 42
HSBC commodities forecasts 44
Disclosure appendix 45
Disclaimer 48
Contents