Steel prices at troughs and on track to a mild recovery
We expect Chinese steel prices to trough in the next 6-12 months with benchmark
HRC price to fall 34% Y/Y in 2009 before trending up a modest 5% Y/Y in 2010 as
the global economic stimulus measures and steel production cuts take effect.
Mike Harrowell, our Australian steel analyst, expects regional steel prices to fall
by 42% Y/Y in 2009 and increase by 0.6% Y/Y in 2010.
Steel prices to be range bound for most of 2009
We believe we are at or near the bottom of steel cycles. De-stocking might continue
in the next 1-2 months in China. But downside risks for steel prices should be limited
on Chinese demand, cost support and shutdown of capacity. In the next 6-12
months, Chinese steel prices are likely to be driven by inventory cycles and trade
range bound as end-users stick to a “need-to-buy” purchasing pattern.
China demand stabilizing, further improvement from 2H09
Chinese steel demand shows signs of stabilizing, though export continues to
deteriorate, and IP data suggest very sluggish activities. Sales of autos and home
appliances, property transaction volumes and infrastructure investments are
picking up momentum in an encouraging way. Bank loans and fixed asset
investments, too, have grown strongly in the first two months of 2009, paving the
way for sustainable demand growth in 2H09. In the developed countries, steel
utilization rate is at only 40-50% with low inventory. Current production levels are
about 20% below demand implied by industry and analyst expectations. There
should be a strong steel demand recovery if de-stocking ends.
Steel share prices at trough-level valuations
Mirroring steel prices, we see steel companies, such as Angang & Maanshan, are
trading at trough-level valuations. We expect profitability to pick up as steel prices
stabilize, raw material prices fall and utilization rates rise. We prefer Angang over
Maanshan on superior margins over time and stronger volume growth. Angang’s
higher ROE should also lead to valuation premium than Maanshan.