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Just how bad are things for Asian steelmakers?
Steel is behaving less like a “global” commodity
Asian steel stocks corrected quite a bit in October, especially after POSCO
(005490.KS, Buy) and then, in quick succession, ArcelorMittal (MT, Buy)
and U.S. Steel (X, Buy) announced disappointing 3Q results and 4Q
guidance. Though Japanese companies came out with better-thanexpected
results, they have provided cautious guidance as well.
Just how bad are things for Asian steelmakers? For starters, Asian steel
capacity is running at an average utilization rate of 86%, vs. 69% for the
US and 73% for Europe. Even in Japan (more comparable to the US and EU),
the utilization rate for NSC and JFE in the Jul-Sep quarter was 96% and 86%
respectively, vs. 77% for US Steel and 71% for ArcelorMittal. Higher utilization
rates in Asia are helping to offset some seasonal weakness.
How could this happen? We go back to our original thesis proposed in our
November 2009 note: Asia, ex-Japan, ex-China, is still net short of steel,
and with lower exports from China, Japan is filling the void, keeping its
steel mills humming – a luxury that western steelmakers don’t have. More
importantly, Asia, US and EU markets have become so disconnected with
so little trade between them that it is misleading to think of steel as a
“global” commodity.
This does not mean the challenges are completely over. This year’s
seasonal weakness has become very pronounced due to adverse
weather conditions. Big parts of south and southeast Asia have seen
massive flooding this year (not to mention, earthquakes, typhoons, etc),
and this has happened late in the season. This has brought the
construction industry to a standstill. Even in countries that haven’t been
affected by weather, such as Korea, construction is very weak. But as the
construction sector accounts for half of Asian steel consumption, apparent
demand in 2H2010 will remain weak.
Our channel checks with traders suggest that while demand in certain
segments/markets remains strong, there is a crisis of confidence leading to
a “buyers’ strike”. There is some expectation though, that – as leading
indicators are strong – once buyers’ confidence returns, prices should
bounce back, perhaps early in 1Q 2011.
Our top picks in the region remain: Baoshan, JFE, Tata Steel (all rated Buy
and on the Conviction List), as well as Maanshan, POSCO and SMI.
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