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Asia: Steel
Equity Research
Déjà vu: Steel cash costs heading back towards 2008 highs...
but we do not foresee the same rises in steel prices and margins...
Spot coking coal prices have been rising since the Australian floods, raising
prospects for a sharp rise in 2Q2011 contract prices. GS&PA has now raised
2Q2011 contract price forecasts to US$280/t from US$245/t, and iron ore
contract prices could also rise, which we see as a mild short-term positive for
Asian steel stocks given the 2008 historical precedent, when coking coal prices
shot up in Jan. following floods and forced some Asian steelmakers to buy
coal at spot prices ofUS$400/t (vs. US$320-$350/t now). Despite this, 2008
margins/earnings improved as spot steel prices also hit an all-time high in
the summer, pushed up by cash costs. We think it would be wishful thinking to
expect an exact repeat scenario – current global macro conditions are not as
supportive and utilization rates not as high - but we still think many
companies will be able to more than pass on costs and see improvements
in their margins in 1H2011. Still, there could be slight deterioration from
the base case for the full year. Price hikes will likely be insufficient in some
markets (such as China), adding to margin pressures. Our outlook on the
Asian steel sector now varies much more from region to region given
valuation movement and differences in pricing power. Pricing power at
Chinese steelmakers is weaker than that of their Indian and Japanese peers
due to a fragmented Chinese market and overcapacity.
YTD rise in steel price enough to pass on costs, for now
1H2011 margins should improve on average. We calculate that Asian
steelmaking cash costs were US$534/t in 4Q2010, and should be US$565/t in
1Q2011. If coking coal prices rise to US$280/t in 2Q, cash costs should rise to
US$599/t – meaning that average steel prices will need to rise by US$65/t
to completely pass on costs. Regional spot prices, in fact, have already
risen more than that – suggesting margins should be intact in 1H (in 2H
they could shrink if prices fall). We cut our EPS forecasts for FY2011 onward
to reflect expectations of higher material costs, mainly in Japan/India, and
lower most of our 12-month target prices accordingly
India, Japan preferred: EPS revised on coal/steel price changes
Based on valuations, our current top picks are Tata Steel, JFE Holdings,
JSW Steel, Sanyo Special Steel and Baosteel, as they stand to benefit
the most from rising regional prices and still offer good value. We have
Sell ratings on Angang (CL) and Daido due to relatively unattractive
valuations. Biggest risk remains policy actions by Asian countries.
Overview: Set for a solid 1H; visibility beyond that remains murky
As costs soar, we expect steel prices will do so too. Steel stocks trade in line with
steel prices, so we think this bodes well for the performance of steel equities. Most
Asian companies should see margins improve in 1H2011 – as they did in 2008, the last
time this happened – but thereafter, we could see margin pressure. We think
steelmakers in India and Japan are the best-placed, while in China we expect
steelmakers to struggle with costs. Our top picks in the region are Tata Steel, JFE
Holdings, and JSW Steel. We also like Baosteel, Sanyo Special Steel, POSCO and
Hyundai Steel. We still have Sell ratings on Angang (CL) and Daido Steel due to
relatively unattractive valuations Our views on the short- and longer-term impact are
outlined below:
• Asian steelmakers will likely see a very strong rise in coal costs, as well as
other cash costs in 2Q (Apr-Jun), and probably for the balance of the year.
• We believe that rising cash costs will lead to higher steel prices in the region,
as has already started happening. We believe the current situation is similar to
what we witnessed in 2008, albeit with two crucial differences: (1) global macro
conditions are less robust with global utilizations lower than in 2008, and (2) even
the larger companies under coverage are seeing their raw material contracts set
closer to the spot prices. Still, valuations are also much lower than they were in
2008, although some may argue that the low valuations are due to high earnings
volatility.
• In fact, as steel prices generally tend to rise in anticipation of a rise in
steelmaking costs, the margins tend to expand at first. We believe this will be
the case in 1Q2011 and perhaps even in 2Q2011.
• However, as Asian steel prices generally tend to be seasonally weak in 2H,
there is a risk that Asian steel margins will deteriorate in 2H2011, even if steel
prices are somewhat supported by higher costs. As such, we believe that margins
could rise for the next couple of quarters, and then shrink thereafter. For the full
year, margin trends are likely to differ from company to company, and market to
market.
• Regional Asian steel prices are up 14% YTD, while prices in the US are up 17%
YTD (and up 30% over the past month), and prices in the domestic Chinese
market are up 8% - this shows that while US and some regional steelmakers are
in good shape to pass on costs, Chinese steelmakers may struggle to do so.
• In terms of order of preference, our favored markets are India, Japan, Korea,
Taiwan and China. We believe that Chinese prices will be weaker, on average,
than regional prices and margins there will be under more pressure – possibly
even in 1H2011. However, we think India will benefit from higher regional prices,
without necessarily witnessing the same level of cost escalation.
• Ironically, Japanese companies are in a relatively good position: (1) their
earnings were relatively weak in FY2010, and from this low base, the prospects of
earnings growth are relatively better, and (2) as they did not get the full benefit of
cost hikes in FY2010, they stand a better chance of putting through higher price
hikes than their Asian peers.
• Our top picks in the region are Tata Steel, JFE Holdings and JSW Steel. We
also like Sanyo Special Steel, POSCO and Baosteel. We think all of these stocks
still offer good value. Our Sell-rated stocks are Angang Steel and Daido Steel as
they are fully valued, relative to their coverage groups. With the view that rising
costs and prices will impact different companies in different ways, we believe the
coming months will create winners and losers – and investors will need to be
selective in the sector.
• We believe the biggest threat to regional steel earnings is not so much rising
costs as the threat of policy actions aimed at combating inflation.
Déjà vu: Feels like 2008
• Our colleagues have raised coal price forecasts following the floods (see
Exhibit 2). GS&PA’s expectation is for 2Q contract prices for hard coking coal
(HCC) to rise to US$280/t (from US$225/t in 1Q). There is a risk of prices rising even
further, as there are reports of spot coking coal being transacted at US$350/t.
• We believe that trading conditions in raw material spot markets are
reminiscent of what happened in 2008 following similar floods. At one point,
Asian steel mills paid US$400/t for coking coal (Exhibit 3), and including freight,
all-in costs were north of US$500/t. The one saving grace was that these spot
cargoes were a small portion of contract coal price, and thus overall costs were
still not very high.
• Steel prices tend to move with cash costs (see Exhibit 7). It is interesting to note
that cash costs in 2008 moved to a record high to US$579/t from April 2008(see
Exhibit 4) for the two large companies in our coverage with contracts. By contrast,
costs at spot-market-based tier-2 steelmakers hit a peak of US$842/t.
• All in all, this helped Asian steel prices to reach an all-time high of US$1,075/t
by that summer (see Exhibit 4) and helped Asian steel companies to record
very strong margins through much of 2008 (see Exhibits 5 and 6). The bottom
line: rising costs do not bode ill for steel companies’ earnings, if they can be
passed through.
Asian steel cash costs set to hit an all-time high in 2Q, but prices already rising in
anticipation
• Asian cash costs peaked in FY2008 at US$579/t (see Exhibits 4, 9), when rising spot
prices of iron ore and coal led to contract prices to be raised from April 2008 at the
large Asian companies we cover. Cash cost was at about US$842/t for smaller Tier-
2 mills in China, which were buying spot iron ore and coal in 2008 (as shown in
Exhibit 4).
• Based on our forecast price of US$280/t for coking coal in 2Q, we estimate
Asian cash costs will be US$599/t in 2Q – a new all-time high. A big difference
this time is that, with the quarterly reset of raw material contracts, costs for even
the larger Asian mills will be closer to the spot-based prices, with a one-quarter lag.
• We have done a sensitivity analysis of what the cash costs will be at various
levels of coking coal and iron ore prices in Exhibit 10. At our current forecast
price for coking coal (US$280/t) and iron ore (US$155/t), we expect cash costs in
Asia (ex-India, where neither costs will be as high), to be around US$654/t (see
Exhibit 10). With the current offer price of steel at around US$720/t, we believe that
the average Asian steel company is already in the black.
• Simple maths show that a rise in coal prices from US$225/t contract price in 1Q to
US$300/t in 2Q (our own forecast is for US$280/t), then – all else being equal –
steelmaking costs should rise US$53/t. YTD, steel prices have already risen
US$90/t , and in effect, this cost increase has already been passed on. What
this ignores is that other costs, particularly those of iron ore, will also rise.
However, we expect overall steel prices to rise higher still.
We believe that margins will expand in 1Q (Jan-Mar) for most Asian companies
as the higher costs do not kick in until 2Q (Apr-Jun) and prices are already up
and rising (see Exhibit 11). The portents are good: while Asian prices have risen
14% YTD, US steel prices have risen 30% over the past month, and are now at a
22% premium over Asian prices (see Exhibit 12). US prices have often tended to
lead Asian prices, and we think new arbitrage opportunities mean that Asian
prices should rise for some time.
• If steel prices continue to rise from here through 2Q (as is the case in normal
years), we believe that many companies will see even higher earnings in 2Q
(Apr.-Jun). Thus 1H2011 earnings overall should improve for most companies.
Steel prices would have risen in 1H anyway; rising cash costs only provide
further support
Even before the disruptions caused by the Australian floods, we were optimistic that
Asian steel prices will rise in 1H2011. This was based on seasonality of Asian prices,
which tend to rise in 1H (and fall in 2H) of each year (Exhibit 14). This year, as we have
noted in earlier notes, we expected that rise to be stronger than usual as 2H2010 saw
particularly depressed market conditions due to very adverse conditions in Asia and the
demand from delayed construction projects was likely to only add to the seasonal
restocking demand.
We believe that the rising cash costs will only add an extra layer of support to rising
prices. As steel stocks generally trade in line with steel prices (Exhibit 13), we believe this
bodes well for the performance of Asian steel equities in the coming months.
Why this time we may not see the peak prices seen in 2008
While record cash costs in 2008 pushed Asian steel prices to record highs too, we believe
there are crucial differences this time which could impede the ability of steelmakers to
achieve record-high steel prices again – despite cash costs perhaps rising to a new record.
One of the reasons is that the global macro environment is less conducive for such
spectacular price hikes again. The best evidence of this comes from looking at the
utilization of the global steel industry (Exhibit 15). Utilization rates in the US and EU are
about 70%-75% now, vs above 90% back in mid-2008. Rates in Asia too – though much
higher, at 85%-90% - are still lower than they were in 2008.
It was only after the Lehman shock in September 2008 and the resulting global credit crisis
that utilization rates fell – and are yet to fully recover in the west. Despite the low
utilization, or perhaps because of supply discipline inherent in it, US steel prices have
managed to rise 30% in the past month to go to a 22% premium over Asian prices
(Exhibit 12). As such, we believe that US/EU mills are unlikely to ship steel to Asia, despite
stronger demand in Asia, thus allowing Asian steel prices to recover too.
Margin pressure possible in 2H2011
As a result of lower global demand overall and the risk of policy actions in Asia to combat
inflation, we believe there is a risk that 2H2011 margins for Asian steelmakers could
shrink. 2H2011 is a time when there should be seasonal weakness in prices anyway. We
expect higher costs to support steel prices at levels higher than they would have been
otherwise, but probably not enough to improve margins further.
But as Exhibit 13 shows, steel stocks tend to trade in line with steel prices, not margins
(though rising prices indicate improvement of margins from the base case), and as such
the specter of rising prices in 1H2011 bodes well for the performance of steel stocks.
Valuations support top Buys Tata, JFE, JSW, Baoshan, Sanyo
Earnings adjusted for changes in coal prices, steel prices
We have factored in the new material costs, and revised our earnings estimates for many
of our Asian steel companies (Exhibit 16) – mainly in Japan and India. In China, where we
were already quite bearish, and where there is less of an impact from coking coal costs, we
are not cutting estimates further. We adjusted estimates for Korean companies following
POSCO’s earnings announcement on January 13.
The big changes are in Japan and India, where there is still one more quarter to go
before the end of FY3/11 (hence, current year earnings are also impacted). Our FY3/11
forecasts for SMI take into account the recent production loss from the Kashima plant. Cuts
to our estimates of Tata Steel’s EBITDA smaller (we now forecast yoy growth of
+3%/+2%/0% for FYs ending March 2011/12/13), but at the EPS level our cuts are more
substantial due to the dilution we foresee from the forthcoming follow-on offering that has
been announced. Cuts to our JSW and SAIL estimates are somewhat larger due to higher
dependence on imported coal.
These earnings changes also lead to slight changes in our 12-month target prices
(Exhibit 17). Note that these target prices are based on the correlation between P/B and
ROE, and are based on FY2011 as the base year.
Potential upsides to our price targets are substantial for JFE, JSW, Tata Steel and
Sumitomo Metal Industries, and we reiterate our Buy ratings on these stocks. We maintain
Neutral ratings on SAIL, Nippon Steel and Kobe Steel.
Valuations are still well below 2008 levels
Given the parallels between the current situation and the one in 2008, it is worth noting
that valuations of Asian steel stocks are well below 2008 levels – even allowing for the
outlook of lower returns now (Exhibits 18, 19).
The Asian steel sector is trading at an average P/B of 1.1X (Exhibit 18), and average
EV/GCI of 0.6X vs CROCI of 8% (Exhibit 19). We have argued that valuations now should
be lower, on average, than in the recent past due to the higher volatility of earnings
resulting from shorter raw material contracts (see note All Change Again, dated July 1,
2010). Still, this is a lot lower, relative to returns, than the 1.9X the sector traded at, at the
recent peak in January 2010, and far lower than the peak of 2.9X in October 2007.
Looking at the correlation between EV/GCI and cash returns (Exhibit 19), we find good
support for our top Buys in the region: Tata Steel, JFE (both on CL), JSW Steel,
Baoshan and Sanyo Special Steel. Angang Steel (Sell, CL) looks clearly overvalued;
Daido is a relative Sell, versus our Buy on Sanyo Special Steel. Hyundai Steel (Buy),
upgraded in December is likely to rerate, based on the outlook of even-higher returns in
2012 (Exhibit 19 shows estimated returns for 2011).
Regional market views: China only market where prices may be
weak for a while
Regional view from steel traders: Very bullish
Regional steel prices have risen about 14% YTD, to US$720/t (for HRC). Traders are
reporting that offer prices are rising every day, and are now being offered as high as
US$740/t. Even long product prices, which were already holding up well, continue to be
strong, especially as billet prices have risen sharply YTD: 12% to US$670/t.
The reasons being attributed to the sharp rise: (1) seasonal restocking, (2) after a lack of
buying in 4Q2010 that has run down inventories quite a bit, (3) coupled with some panic
buying, looking at rising costs, and (4) emerging arbitrage opportunities, as US steel
prices have risen to US$880/t (a 22% premium to Asian prices).
Traders we have spoken to believe that these price hikes will continue as there seems
to be a general acceptance that Asian prices will rise, given the rise in cash costs
following the floods in Australia. Overall, the sentiment now is “more positive than
negative” according to the traders and such sentiment is causing buyers to be more bold in
restocking and volume per customer is rising.
China: Steel price hikes not sufficient to offset rising costs on
overcapacity / market fragmentation
We notice that Asian regional steel prices are rising on the back of rising input costs
including iron ore and coking coal, however, we see very little upside in China domestic
steel prices. Its more fragmented steel market, combined with increasing overcapacity,
means that Chinese steel mills are unlikely to fully pass through the rising input costs, even
with some prices hikes.
We remain cautious on the China steel sector as we believe there is still major overhang in
the sector in light of the factors listed below.
Policy risk
In contrast to the bullish regional steel traders, Chinese steel traders are increasingly
concerned about potential policy risk. According to our channel checks, many steel
traders are being chased by their banks for repayment or providing additional collaterals.
As Chinese steel traders rely heavily on bank lending, any credit tightening will likely lead
them to liquidate their inventory, usually at a discount to market price, driving down steel
spot prices.
Weak pricing power
Although Baogang, Shagang and Wugang raised their Feb delivery prices this week and we
expect Angang to follow suit soon, we believe overcapacity and market fragmentation
will prevent Chinese steel mills from fully passing through input costs rise. Since midDec 2010, import iron ore prices increased by 5% mom (about RMB55/t) and coking coal
price surged by 16% (RMB220/t). This would translate into an increase in per tonne crude
steel production cost by about RMB242. However, Baosteel raised its Feb price by only
RMB100/t for most of its products. The fact that even the industry leader is unable to pass
through the rising costs has led us to expect further margin squeeze for Chinese
steelmakers in 1Q10.
No impact of Queensland floods on Chinese steel production
Coking coal supply interruptions from floods in Australia are unlikely to have any
meaningful impact on Chinese steel production as most Chinese steel mills source
coking coal domestically and many have inventory sufficient to support production for 1-2
months, based on our channel checks. China daily crude steel production has already
increased 8% from early Nov (1.60mt/day) to late Dec 2010 (1.73 mt/day). We expect a
further rise in China steel output in January.
Slow export recovery to support regional prices but further suppress domestic price
Steel mills and traders also told us that the export order book is slow and that they are
not incentivized to export at current export prices. China revoked the export tax rebate
in July 2010. We do not anticipate any material increase in Chinese steel exports until there
is a meaningful price gap. This would support regional steel prices while continuing to
depress the Chinese domestic market due to increased supply flows.
We remain underweight on the Chinese steel sector.
India: Sharp price increases driven by strong demand momentum,
tight market balance, and cost push drive
Domestic demand gains momentum
There was a brief spell of soft demand in Oct.-Nov. caused by weak off-take from the
infrastructure/construction sectors during an extended period of rainfall, but demand has
since picked up. Real demand from end-consuming segments like automobiles and
infrastructure/construction is regaining traction, buyers are back in the fray anticipating
strong growth in 4QFY11, which is seasonally the strongest period for steel consumption.
Steel inventories across the system have been run down and restocking demand has
driven higher off-take from steel mills, which have started reporting lower inventories at
the end of Dec (compared to Sep end). Note that YTD steel consumption growth is 8.8% vs.
FY11 forecast of 12%.
Sustained price hikes to be driven by regional price momentum and cost push
Indian spot steel prices have risen by 8%-10% in the last 5 weeks. After remaining subdued
during Oct-Nov., domestic steel prices have been on an upward trajectory since December,
driven mainly by a surge in regional steel prices and spot iron ore and coking coal prices.
Domestic steel prices have a high correlation to regional steel prices (R-square of
80%) and have traded at a premium to import parity given the tight supply situation in
domestic markets. Even now (post recent price hikes), domestic prices are at a marginal
premium to import parity – implying that further increases in regional prices and INR
depreciation will drive domestic prices even higher. The spike in spot coking coal prices
post the adverse weather in Queensland is leading to a scramble among steel buyers to restock ahead of further price hikes. This has put pricing power back in the hands of steel
mills. Our channel checks with traders indicate that this scramble for tonnages may
continue until March end. We now expect the average domestic HRC price to rise by
14%/5% yoy in FY11E/FY12E (vs. 12%/2% previously).
Indian steel mills have adequate coking coal cover
Our channel checks show that Indian steel makers have comfortable levels of coking
coal inventory that can last for the next 2 months. Moreover, all three steelmakers are in
talks with the suppliers in North America, to plan for any further delays in supply. In our
view, there is still significant risk from further increases in contract pricing (current
estimate of $280/t for 1QFY12) even if disruption in coking coal supply is not a source of
concern for Indian steelmakers in the near term.
4Q earnings to rebound strongly
Against the backdrop of rising steel prices and strong demand momentum, we believe that
4QFY11/1QFY12 should be relatively strong quarters for Indian steel makers. With higher
raw material costs to start flowing in only from 1QFY12, we expect the Indian steelmakers
to witness strong operating margins for at least the next two quarters.
Prefer Tata Steel and JSW Steel on Attractive Valuations
We maintain our Conviction Buy rating on Tata Steel with a 12-m P/B based TP of Rs761
and Buy rating on JSW Steel with a 12-m P/B based TP of Rs1286.
Japan/Korea: US outlook as important
Japanese steelmakers are in a relatively better position
In Japan, steel companies are in decent shape because (1) they are coming off a low base
of earnings and margins, (2) there is a greater likelihood of winning price hikes from
customers now because companies did not raise prices much in 1HFY3/11 (this is
especially true because customers increasingly recognize the need for price hikes), and (3)
Japanese steel makers can always cut production if they are unable to pass on cost
increases as utilization rates are high and exports are close to 50%.
Overall, we believe that margins will be lower for 3QFY3/11 and once we move beyond
these backward-looking earnings season in late January, the stage should be set for
earnings recovery in 4QFY3/11 and 1QFY3/12. We expect all domestic customers to agree
to large price increases for 1HFY3/12, although negotiations for these may not be over until
June 2011.
Even the 2H outlook could improve in Japan
Our ECS team is looking for a strong recovery in the US economy in 2H2011. At the same
time, they expect the JPY to weaken. The fortunes of many steel-consuming downstream
industries (autos, machinery, etc) depend on the outlook of the US economy, and we
believe that Japanese steelmakers have an opportunity to retain higher steel prices
through FY3/12.
Furthermore, steel customers are big exporters and their reluctance to accept much higher
steel prices was driven by the strength of JPY. Should the currency be weak in 2HFY3/12,
these customers may be more willing to accept higher steel prices.
As such, there is a possibility that Japanese steel earnings remain reasonably strong
even in 2HFY3/12, even as other Asian peers see margin pressures in 2H.
Our top picks are JFE Holdings (Buy, CL), Sanyo Special Steel and Sumitomo Metal
(5405), the latter a more-structural pick. JFE has the highest exposure to regional spot
markets; hence, the best ability to pass on the rising costs. All three stocks trade at very
attractive valuations. We have a Sell rating on Daido, more as a relative call versus the Buy
on Sanyo Special Steel.
In Korea, policy actions could create “noise” but not headwinds
Like Asian peers, Korean steel companies should see an improved 1H2011.
The Korean government is clearly concerned about inflation: it recently asked steelmakers
to voluntarily refrain from raising prices, and also raised interest rates. While the news of
price guidance may create some noise in the markets, we do not expect it to create
any real problems for steelmakers, as a rising price differential between Korea and the
region will cause more Korean steel to flow overseas, closing the price gap. Already,
regional steel traders are reporting that they are sourcing more steel from Korea.
Valuations still supportive, though now they offer less upside than many regional
stocks
We continue to have a favorable view of the Korean steel sector for now. Valuations
have risen but are still supportive despite upsides being less than on many stocks in other
Asian regions. Korean steel stocks have traded in line with regional steel prices, and we
expect those prices to rise. Korean steelmakers will also benefit from a possibly stronger
won (as steelmakers are net-short the USD, a strong KRW tends to raise margins).
Structurally, though, we have concerns about Korean steel margins over the next 2-3
years. Ramping up new capacity is likely to reduce imports and make Korea a net-exporter
of steel. Export margins tend to be lower than domestic margins and the blended margins
could get lower as the export portion rises.
Our top picks are POSCO and Hyundai Steel, though the latter’s recent gains leave less
upside to our price targets. POSCO remains attractively-valued (at 1X book, vs expected
ROE of 13%) but corporate actions (such as non-core investments) are worth keeping a
close eye on.
But everyone is watching the emerging situation in China, especially after the Chinese New
Year holidays in early February
Taiwan: Steel prices will remain at or above current levels in 1H
We expect the domestic steel product prices to remain at or above the current level in
1H11, primarily based on: (1) re-stocking demand from downstream customers, (2)
sustainable demand conditions on domestic economic recovery, and (3) the cost push
effect on rising hard coking coal and iron ore prices.
While we expect to see positive momentum for domestic steel product prices in 1H11, we
see little room for significant margin expansion due to increasing pressure from rising raw
material costs (with our GS&PA commodity team recently upgrading 2011E hard coking
coal price by 6% to US$254/t, versus the level of US$191/t in 2010).
Valuation: Retaining Neutral rating on China Steel. We think a significant share price rerating for China Steel (CSC) will require more visible margin improvement and perceptible
signs for US/ Europe demand recovery. We maintain our Neutral rating and 12M EV/GCIbased TP of NT$40.70. The stock is currently trading at 1.6X 2011E P/B with 2011E ROE of
14% (vs. the historical average P/B multiple of 1.6X and ROE of 17% since 1997).
Risks: Global macro, rising inflation
• Inflation is already a concern for many Asian governments and efforts to tame
it could result in rising rates to asking steelmakers not to raise prices further (as
has happened before). If steelmakers in certain countries cannot raise prices, there
will be margin pressures.
• While there are similarities with 2008, when costs and hence, steel prices went to
record highs, the one big difference now is that global macro conditions are less
robust now. Furthermore, global utilization rates are lower as well, which could
lead to less supply discipline.
• Another risk is that raw material contracts are now reset every quarter. Thus
even the larger steelmakers now face the same costs (albeit with a quarter’s lag),
whereas in 2008, the higher costs for smaller steelmakers provided a nice high
floor for prices.
• Our ECS team is expecting strong growth again this year for China, and a recovery
in the US. Should Chinese growth come in below expectations, even a
potential recovery in the US may not be enough to compensate for the slowdown
in China.
• Volatile currencies. A weak US dollar is generally good for steel prices, but with
an expected US recovery, our ECS team is also expecting the US dollar to
strengthen. Furthermore, some Asian currencies such as the KRW and JPY have
an outsized impact on their steel markets through the knock-on impact on
exporters.
• Potential corporate actions are another source of risk, with many steelmakers
in Asia expected to make significant investments, including potential M&A. Some
Japanese, Korean and Indian steelmakers have announced significant investments
plans; others may follow. The Chinese government previously announced plans to
consolidate the domestic industry, and this may also lead to corporate actions
there.
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