Asia Pacific Steel
Waiting For An Opportunity
Commodity price revision: Our global team has
published the latest version of its quarterly playbook,
where we have made changes to our steel, coking coal,
and iron ore pricing forecasts. Please see, Morgan
Stanley Global Metals Playbook – 4Q09: A
Strengthening Cycle, dated Oct. 14, 2009, for greater
detail on these revisions.
Chinese steel pricing has fallen ~20% from its early Aug.
peak. The weakness in Chinese pricing is likely to be
temporary, we believe, as it is not due to a slow-down in
demand but rather over-production and high inventories.
However, Chinese HRC prices at $490/t stand below
cash cost levels for its marginal producers and roughly
$100/t below N. Europe or US pricing. As such, we
forecast slowing production from small mill down-time
coupled with a modest pickup in exports to help balance
the markets and stabilize pricing in 4Q09.
We have raised our steel price forecasts by 2-8% for
2009-11 as regional pricing has recovered more quickly
than originally expected. While we see higher earning
with higher pricing, higher raw material costs are also
forecast for 2010-11, which we believe will cap EPS
improvement. On a net basis, we raise our 2010-11
EPS forecasts by ~20-25% on average for steel stocks
under our coverage, with the biggest earnings upgrade
in the Chinese names. However, we leave the price
targets of the Chinese steel names unchanged, as our
PTs now reflect the new steel price assumption in our
base case. We already previously incorporated higher
steel prices in setting our PT for the Chinese steel stocks
in Aug. ’09. We upgrade China Steel to EW as the stock
trades close to our new PT of NT$27.50.
Our preferred stocks in the sector are OW rated Posco,
Hyundai Steel and Baosteel. We look for opportunities
to get more constructive on the steel stocks as we see
earnings recovering with higher pricing.