Steel
After restocking, then what?
Overcapacity caps price upside: After the
restocking-led recovery in steel prices, we believe
further price increases for European steel producers will
be driven by cost-push inflation rather than margin
expansion. This will continue to be the case until global
capacity utilization grows to c.85%, which would require
further demand increases of the order of 230mt (c.19%
of 2009e global demand) on our estimates.
Recovery already priced in: We recognize that volume
growth and operating leverage will continue to increase
the profitability of the steel producers. However, we
believe the market understands this and consensus
estimates have 2010 EBITDA more than doubling from
2009 levels for the industry. Even on those higher
earnings assumptions (which have downside risks if the
recovery is not as strong as anticipated), the sector now
trades at 10.5x 2010e consensus P/E, and we do not
see material upside from here.
We see better value and earnings momentum in
miners: Commodity pricing spikes (translating into
improved margins) are more likely in
capacity-constrained industries like the miners
compared to those with overcapacity like steels.
Arcelor Mittal preferred in European steel sector:
a) Integrated vs. non-integrated: Further price
increases in steel should be driven by cost-push inflation
and as the most backward-integrated steel company in
Europe, ArcelorMittal should benefit from this trend.
b) Further cost-cutting and optimization potential:
Having a portfolio of c.70 plants, the possibility for cost
optimization is unique for AM and there is potential
upside risk to the stated $5bn management gains target.
c) Lowest EBITDA/t discounted: The European
carbon steel sector is already discounting an EBITDA/t
of $200/t on our estimates (close to normalized,
adjusted for the quality specs), while Arcelor is
discounting c.$115/t of EBITDA from 2010 onwards.