Attractive view of BF－ We raise forecasts as auto
demand rebound and strong exports advance
volume recovery; we expect stocks to price in ‘real
earnings power’ emerging in 2H: Export steel orders
are strong, and auto steel orders have been recovering
in Japan since June. It is difficult to forecast ‘true
earnings power’ amid big losses for F3/10 1H (including
one-off causes) and the current fall in Chinese prices,
and it is this that we focus on.
Globally, the steel supply/demand cycle is still only
bottoming out and there is much room to price in strong
earnings recovery once early-2010 price talks over key
raw materials and with large users are out of the way.
Our top pick is JFE for cost competitiveness, valuation.
Keys for China are brisk demand and responsive
management; due to structurally high materials
costs, prices to bottom soon and near break-even:
With China leading global economic recovery,
commodity prices can stay high driven by internal
Chinese demand. High exposure to spot markets means
Chinese makers are hobbled by rising materials costs,
and limits the risks of an export offensive. Steel spot
prices should bottom soon from below-cash-cost levels,
backed by solid raw materials prices amid brisk demand.
Next confirm medium-term strategies; focus shifts
to downstream: After we can confirm real earnings
power, growth strategies will be the focus. Unlike prior
plans built on expansion of high-grade steel supply, this
time downstream plans for broadening customer bases/
sales networks and beefing up group capability are key.