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UBS Investment Research
Asia Steel Insights
China prices on the rise
China spot steel prices on the rise
The China HRC price rose two consecutive weeks to US$559 (excluding VAT) due to
improved sentiment, rising raw material costs, and falling inventory. This comes amid
rising US steel prices as advanced nations' inventory are also low and costs are up.
China total traders’ inventory is falling at a slower pace given expectations of a higher
steel price and a low inventory level. Likewise, iron ore inventory has risen since
November. However, negative spot HRC spread continues to widen due to rising costs.
Q111 coking coal and iron ore contract implies +US$26/t in cost
Japan mills settled the Q1 HCC price with BMA at US$225/t FOB (+US$16/tQoQ or
+8%), with Russian PCI reported to be settled at US$142.5/t (+US$12.5/t, +10%).
Heavy rain is still hampering supply and raising spot price. Iron ore price continues to
rise too. We estimate Q1 contract RM implies +US$26/t in steel making cost. Steel
making cost changed +US$151/t in Q2, +US$56/t in Q3, and -US$49/t in Q4.
Key issues to watch
China Steel is indicating upside risk to its March prices after a 3% cut in January-
February given rising costs. We expect POSCO to lower the Q1 price (end-December
announcement) but view it to be the bottom. Japan mills are negotiating for +US$50-
100/t for Q1 exports to Korea (HRC, plate).
Expect stronger H111 market
We expect the China steel price to rise in H1 driven by rising costs, inventory
restocking, and better demand given the start of the 12th Five Year Plan. This should
support regional steel prices. However, we expect hiccups from potential rate hikes and
resurgence of supply as the energy-saving measure ends. We prefer Baosteel, Hyundai
Steel, and Tata but see upside risk to high beta/vertically integrated stocks if steel
prices rise in H1.
China
What happened and what it means:
China spot steel prices have started to recover since the past two weeks, with the
spot HRC price at US$559/t (excluding VAT) as at 10 December, according to
World Steel Dynamics (WSD). This is due to improved sentiment on the plan
for public housing construction, rising raw material costs, and falling inventory.
We believe steel prices in China could remain strong in H1 as restocking
continues while demand returns. Steel futures prices are also indicating higher
prices in the coming months.
Overall traders inventory continued to decline to 12.9mt but the pace has slowed
as the rate of decrease in flat steel has declined from -1.7% to -0.1% last
week. The pace has slowed given expectations of higher price and inventory
being low, at levels close to early 2010. We believe the inventory fall will
reverse and restocking will occur in H111.
Iron ore inventory at ports rose 1.7% WoW to 72.8mt as at 10 December given a
rising iron ore price. Iron ore inventory has been on the rise since November.
Korea
What happened and what it means:
Korea November domestic vehicle sales fell slightly to 133k units, down 3%
YoY and down 1% MoM. On a seasonally adjusted annual selling rate (SAAR)
basis, November demand slipped to 1.52m (down 10% YoY, flat MoM). The
10% YoY decline is due to the high base given government subsidy in 2009.
Hyundai’s market share declined to 45.5% (versus 47.2% in October) due to
supply disruption from a labour strike at the #1 plant in Ulsan, but Kia increased
its share to 33.2% (versus 32.5% in October).
Korea construction indicators are improving with housing unsold units falling to
99,033 units, the lowest since September 2007. Transaction has improved while
property prices have started to rise nationwide. We expect housing starts to rise
in 2011 as the housing market improves.
However, global new ship orders remain flat QoQ at 6.8m dwt in November,
and below the YTD monthly average of 9.8m dwt given a weak freight rate. We
expect ship delivery to peak in mid-2011 and begin to slow from H211 and into
2012.
What to look out for:
We expect POSCO to announce the Q111 domestic contract price 7-10 days
prior to the end of December. We expect prices to fall 5-10% as POSCO steel
prices are at a premium to international prices and raw material input costs are to
fall given the inventory effect. However, we expect Q2 contract prices to rise on
higher raw material prices and better demand.
Japan mills are offering +US$50-100/t for Q1 steel exports to Korea with HRC
at US$750/t and plate at US$850/t. We believe +US$50/t as more likely given:
1) an HRC price hike is not easy given increased competition from new
capacities in Korea; and 2) slowing shipbuilding demand, although new orders
are stronger than expected YTD. However, Japan mills contend that the plate
market is tighter than expected given demand from heavy machinery and pipes.
India
What happened and what it means:
— The Karnataka iron ore export ban has been upheld by the Karnataka
High Court. This would mean lower iron ore prices for players in
Karnataka such as JSW Steel.
— RIO has shown interest in Riversdale where Tata Steel owns a 24% stake
(in addition to the 35% stake in the Benga project). If Tata Steel sells out
in RIV at offered prices of A$15/share, Tata Steel would get cUS$850m
(implying Rs42/share). We think this would be positive for the company
as it will help it deleverage.
What to look out for:
Indian companies are looking to raise prices by ~3% (Rs1500/t) on account of
new coking coal contracts (US$225/t) and rising iron ore prices (effective 1
January).
Taiwan
What happened and what it means:
China Steel (CSC) has lowered January-February domestic prices by 3.2% (-
US$25/t) on weak demand and an appreciating NT$. CSC has cut flat steel
prices by 3-7% with HRC down 5% to US$630/t. However, CSC has left wire
rod and steel bar prices unchanged. But the price cut is less than raw material cut.
Still, the margin expansion in Q1 is less than what we had previously expected.
The CSC HRC price is one of the lowest in the region.
The buying sentiment for the property market has improved after the municipal
election at end-November. Although Chinese capital investment remains the mid
to long-term catalyst, the expectation of further benefits from sustainable,
amicable and stable cross-strait relations will continue to boost positive
sentiment, in our view. UBS property analyst Ally Chen is positive on the
property market in 2011, which should provide firm demand for constructiongrade
steel.
What to look out for:
China Steel is indicating upside risk to its March prices after a 3% cut in
January-February given rising costs.
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