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UBS Investment Research
Asia Steel Insights
An eventful week
Monthly met coal contract? Talks scheduled in March
BHP Billiton (BHP) last week asked Japan blast furnace steel makers to shift to
monthly contracts for metallurgical (met) coal from April. Whether this will
materialise or other suppliers will follow suit are uncertain, but we think BHP’s
demand is likely to prevail. We estimate the impact on steel mills will be negative
unless the steel price scheme can better reflect cost changes.
China spot steel price stabilises after the fall
China spot steel prices are in a flux, despite Baosteel’s price hike, with HRC down
1.6% WoW to US$622/t (excluding VAT) given stricter property measures and the
reserve requirement ratio hike. We think prices have since stabilised as Angang
and Bengang have raised March contract prices. Iron ore price slid after reaching a
record high last week, but coal prices remain stable. At the current input price, we
estimate mills’ cost would rise by cUS$130/t for Q2 contracts.
Key issues to watch
China Steel will announce April-May domestic prices on 24 February. We expect
prices to rise by US$50-70/t, lower than our previous estimates (US$70-100/t).
While talks between BHP and the Japan mills will start in the first week of March,
JFE has already rejected the proposal, according to Reuters. Asian mills are also
against the scheme but are likely to follow Japan's decision.
Continue to expect higher listed price in H111
We expect contract steel prices to rise in H1 despite a pause in spot price, but see
contract prices tailing off in H2. Baosteel, Hyundai Steel, Tata Steel and Nippon
Steel and Sumitomo Metal remain our most preferred stocks. But with volatile
markets due to the unrest in the Middle East and North Africa, we believe stocks
such as POSCO, which corrected sharply, also look attractive.
India
What happened and what it means:
According to an article in Economic Times, the government is considering
amending the mining tax law (that is, replacing the proposed 26% mining tax
rate with a higher royalty rate [currently 10% ad valorem]).
We had highlighted earlier, based on our channel checks that the mining tax in
its current proposed form of a 26% rate was unlikely to be introduced. However,
the government has yet to clarify on and also the proposed higher royalty rate.
However, we believe the quantum of the hike in the royalty rate is key. We think
a higher royalty rate is more convenient to administer (both for corporates and
the government). Companies will be able to pass on the increase in the royalty
rate to domestic consumers but not to international one (as international prices
prevail).
Our stock call:
Costs for the steel companies will increase. Assuming the royalty rate increases
to 20% (from 10%), we estimate steel companies' cost will increase by US$15/t
(assuming 10% royalty to be cUS$8.5/t which was the royalty cost which
NMDC paid last quarter). Companies will be able to pass on higher costs to
domestic users (especially in the long product segment). We believe this will not
have a material impact on the profitability of steel companies (even is they are
unable to fully pass on cost increases). We have Buy ratings on Tata and JSW
and a Neutral rating on SAIL.
China
What happened and what it means:
The past week was eventful in China: Baosteel raised its March price by
Rmb300 (US$46) and National Bureau of Statistics announced A 4.9% rebased
CPI on 15 February, Beijing announced strict measures on property purchases
on 16 February when steel future and spot prices began to roll over, and there
was a further 50bp hike in the RRR on 18 February, and a 5% increase in the gas
price on the 19th. We think these negative factors have resulted in a cautious
view on the steel sector in China.
Spot prices have been a flux, falling last week given stricter property measures,
a 50bp hike in RRR and some a slight change in sentiment among steel traders.
Prices have stabilised this week, helped by news that Angang and Bengang
raised March prices on 22 February. This follows Baosteel’s decision to raise
prices last week.
Traders' steel inventories continued to rise reaching a record high, much higher
than the H108 peak, despite rising prices. Imported iron ore inventory stabilised
last week, after reaching a record high. Hubert Tang, UBS China steel analyst's
had expected restocking in February; steel and ore inventory rose 6%WoW and
flat WoW to 18mt and 80mt, respectively.
What to look out for:
In light of the recent developments in MENA, how might policy in China
change? The Politburo meeting on 18 February stressed the need to "prevent
large ups and downs" in the economy, which investors seem to have interpreted
as the government will focus on growth, as it is concerned about a hard landing.
The view seems to be that the government is not overly concerned about
inflation as it considers this to be controllable.
We do not expect significant government tightening and believe the government
will remain cautious when it comes to tightening overall lending. UBS continues
to expect RMB new lending to reach about Rmb7trn in 2011. However, we
believe it is too early to consider relaxing the policy.
UBS believes the government has become more vigilant about keeping inflation
and housing prices under control. In addition, it views the earlier-than-expected
rate hike on 7 February as a signal that the government is more concerned about
this. Our economics team expects two more rate hikes in H1, followed by a
possible hike in H2.
Our stock call:
We continue to favour Baosteel and CMR. We think Baosteel has demonstrated
its ability to pass through rising raw material costs, due to its premier product
mix that benefits from China’s demand for high-end steel. CMR differentiates
itself with exposure to upstream raw materials, that is, scrap steel, demand for
which has been rising steadily in the overseas and domestic markets
Japan
What happened and what it means:
BHP seeking monthly pricing for coking coal
Major coking coal producer BHP has asked Japan’s blast furnace steelmakers to
shift to monthly pricing of the coking coal, which are currently priced quarterly.
We believe no decision has been taken at this stage and note that price talks are
scheduled for the first week of March. Still, this looks to be in line with BHP’s
earlier aim of shifting the raw material pricing mechanism to a spot market basis.
The company may call for monthly pricing at the upcoming negotiations.
Domination of high-grade coking coal in the hands of a few mining companies
is intensifying and given that the number of suppliers is limited, the steelmakers
may have to agree. Monthly negotiations seem likely from this April. It appears
that BHP has always wanted to set main raw material prices at short intervals.
Last year, it was decided to set prices every quarter instead of the previous
practice of once a year. Now, BHP is reportedly asking clients to set prices
monthly. BHP may ultimately be seeking to have raw material prices track
market rates, as is the case with contract prices for copper and aluminium. BHP
may make similar requests for iron ore as well.
However, several issues need to be resolved in order to shift to a market price
method. For iron ore, there are the Metal Bulletin’s Indian iron ore prices and
Platts’ spot prices, but they are not ‘well organised,’ unlike the LME, so spot
prices are difficult to track. For coking coal, trading volume in the spot market is
very low, and there is no reliable data. These are some of the issues associated
with a potential switch to a system to track market rates.
Meanwhile, unlike copper and aluminium, steel products tend to be more ‘tailormade’
in terms of size, constituents, and other details for each client. In the
automotive and the shipbuilding industries, steel cost makes up a large
percentage of the entire cost, so clients prefer to keep steel product prices stable
over the long term; revising steel product contract prices at shorter intervals to
track spot material prices do not match the business practice. After all,
steelmakers’ clients have resented setting raw material prices on a quarterly
basis, so it has been agreed with large-lot users to determine prices on a semiannual
basis. The Nikkei reports that setting raw material prices on a monthly
basis could potentially damage the BF industry’s margins.
Key data
In January, Japan’s crude steel output was +10.7% yoy and +5.3% mom (s.a.).
Annualised output was 113.67m tonnes. BF output was +7.8%, EAF -3.5%.
Ordinary steel was +7.2%, specialty steel -0.8%. The prior-year period saw
some issues at JFE BF facilities, and this year there was a rebound from this.
The mom increase reflects a recovery in SMI’s Kashima BF facilities after
operational issues. Demand was solid in Asia, including demand in anticipation
of price hikes. Output at the companies remains at high levels, driven by exports.
Over the past two weeks, not much has happened in the steel product market.
Output costs are expected to rise by roughly ¥3,000/tonne in January-March and
about ¥11,000/tonne in April-June, thus requiring a price hike of c.
¥15,000/tonne. However, so far spot hot rolled sheet price has only risen by
¥4,000/tonne.
Iron ore and coking coal prices have both been somewhat weak more recently,
but they are still at elevated levels.
Ferrous scrap price is falling in the US but trending higher in Japan. Demand is
strong in Asia. Ferrous scrap prices are weak in Europe and China, and overall,
ferrous scrap price—a leading indicator of steel product prices—are trending
higher.
Key indicators
End-December 2010 ordinary steel product inventories grew slightly, due to
stagnant exports amid unfavourable weather in December. This is a temporary
issue about which we have no serious concerns.
Steel product export prices in Japan fell for steel sheet but rose for thick plate in
December 2010. This price trend explains why the steelmakers revised down
their guidance.
Raw material prices remained firm.
What to look out for:
Impact of setting coking coal prices monthly
Given the Japanese BF industry’s business flow, determining prices for the main
raw materials and steel product prices annually seems ideal. Yet, the current
quarterly system is also to the disadvantage for Japanese BF operators in several
aspects.
For iron ore, the contract price for the following quarter equals the average price
of the past three months. Coking coals contract prices are determined by taking
into account the spot price at around the time of price negotiations. Therefore, if
the spot steel price falls after the raw material price is settled at a high level,
then margins would be compressed. Indeed, margins were compressed in Q2 last
year. Settling prices on a quarterly basis could be disadvantageous when steel
product supply-demand is loose, and in our impression it is too much of an inbetween
approach compared to the long-term method and a method reflecting
market rates.
To reflect spot rates, prices should be revised at shorter intervals, and steel
product prices should also be revised more frequently, in which case there could
be more opportunities for BF steelmakers to improve their margins. China-based
Baosteel and South Korea based POSCO revise steel product prices monthly.
Japan’s users resent monthly steel product price revisions at home but not
overseas. Japanese automakers and home appliance makers accept monthly price
changes at their production sites Asia. Resetting steel product prices monthly is
a global trend.
If Japan’s blast-furnace steel manufacturers tell users that they want steel
product prices to be set monthly, users may not agree right away, and
implementation may take some time. Initially, margins could be at risk, and
related newsflow could be negative. However, it could provide steelmakers with
an opportunity to make steel product pricing more transparent and consequently
improve margins. Nonetheless, steel product prices are determined by supplydemand
and forex, so what we really need are perhaps recovery in global
supply-demand conditions and a weaker yen.
Fundamentals
The weather in Queensland Australia has more or less stabilised (despite being
hit by a cyclone), and it now seems less likely that the Japanese BF operators
would have to cut output due to coking coal shortages. Globally, steel product
demand is growing, so output is likely to be maintained at a high level. Yet, the
key issue is the aforementioned metal spread. Globally, there is oversupply, so
even if prices rise, sustainability seems uncertain. Raising domestic prices could
be difficult to negotiate with clients.
Ferrous scrap prices are trending higher again, and margins could be compressed
at Japan’s EAF operators. We therefore believe that there could be further price
hikes.
Korea
What happened and what it means:
Inventory restocking continued in December 2010 with total inventory up 5%
MoM to 3.3mt, largely driven by rising flat steel inventory. Steel mills stated
that demand remains firm YTD, driven more by restocking prior to price hikes.
Mills expect demand to pick up as weather warms up.
Korea net exports continued to expand in December 2010 at 630kt up 273%YoY.
Higher flat product pipe net exports were the key reason behind the increase.
Still Korea remained a net importer in 2010. However, we expect this trend to
reverse in 2011 as Hyundai Steel's #2 blast furnace ramps up production while
POSCO's new Pohang steel mill is built. We believe long steel could turn into
net import for a short period of time in Q1 as traders stock up prior to the
seasonal pick up. But we believe Korea will become structurally a net exporter
from 2011. Korea has been a net importer since 2002, with the exception of
2009.
According to TEX Report, Japan mills plan to offer US$1000/t FOB
(+US$250/t QoQ) for Q2 ship plates to Korea. Although we expect the actual
price to be negotiated lower, we forecast steel prices to rise in Q2 given the cost
push (+cUS$130/t QoQ at current input cost). The offer price is well above
POSCO's listed plate price of US$840/t.
What to look out for:
Korea Express stake sales were launched with the ‘teaser letter’ sent to 10
companies on 16 February. According to Hangkyung, (20 February) the likeliest
contenders are Samsung, POSCO, Lotte, GS and CG group. The deadline for
letters of intent (LOI) is 4 March, and the preliminary bid and shortlist
announcement is to be in March. After the announcement, the selling party
targets to receive final bids in April, select the preferred bidder in mid-May, and
close the deal by end-May. Our analysis of recent acquisition (Hyundai Motor
Group's acquisition of Hyundai E&C) suggests an acquirer's stock
underperforms post submitting LOI but after being priced in, tends to move with
fundamentals. Share prices tend to rise post deal, regardless of winning or losing
the bid, as overhang is resolved.
Our stock call:
Our top pick in Korea is Hyundai Steel given strong earnings and structural
growth.
But with volatile markets due to unrest in MENA, we believe stocks that have
corrected sharply such as POSCO also look attractive. The stock is trading at
0.9x 2011E P/BV (excluding treasury shares) compared with its historical range
of 0.9-1.2x, and consensus has a negative view. We reiterate our view that it is
the best period to buy cyclical stocks such as POSCO, when consensus is
bearish.
Taiwan
What happened and what it means:
On 21 February, Dragon Steel, a subsidiary of China Steel, announced it was
raising the billet price by NT$1,000/ton to NT$25,200/ton, based rising
international billet and scrap prices. We expect other billet producers in Taiwan
to follow suit.
Feng Hsin iron & Steel (2015.TW) raised its official weekly price quote on
domestic rebar products by NT$300/ton post the Lunar New Year (LNY)
holiday. This price quote is flat at NT$21,300/ton for rebar and NT$22,600/ton
for section steel. Tung Ho Steel has raised its domestic price quote for section
steel for three times since 2011.
What to look out for:
China Steel is to announce its contract price for April-May on 24 February. We
expect China Steel to raise prices by US$50-70/t (NT$1,500-2,100/t), below our
previous expectation of US$70-100/t given softening sentiment in China and
push back from customers. The representatives from the Taiwan Fastener
Trading Association had a meeting with China Steel and expressed their hopes
that the price rise for wire rod would be less than NT$2,000/ton, considering
cost competitiveness of downstream producers.
Our stock call:
We believe a rising steel price could provide support for China Steel in the near
term. But we believe the sentiment could weaken in H211 as raw material prices
fall while inventory restocking is completed.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia Steel Insights
An eventful week
Monthly met coal contract? Talks scheduled in March
BHP Billiton (BHP) last week asked Japan blast furnace steel makers to shift to
monthly contracts for metallurgical (met) coal from April. Whether this will
materialise or other suppliers will follow suit are uncertain, but we think BHP’s
demand is likely to prevail. We estimate the impact on steel mills will be negative
unless the steel price scheme can better reflect cost changes.
China spot steel price stabilises after the fall
China spot steel prices are in a flux, despite Baosteel’s price hike, with HRC down
1.6% WoW to US$622/t (excluding VAT) given stricter property measures and the
reserve requirement ratio hike. We think prices have since stabilised as Angang
and Bengang have raised March contract prices. Iron ore price slid after reaching a
record high last week, but coal prices remain stable. At the current input price, we
estimate mills’ cost would rise by cUS$130/t for Q2 contracts.
Key issues to watch
China Steel will announce April-May domestic prices on 24 February. We expect
prices to rise by US$50-70/t, lower than our previous estimates (US$70-100/t).
While talks between BHP and the Japan mills will start in the first week of March,
JFE has already rejected the proposal, according to Reuters. Asian mills are also
against the scheme but are likely to follow Japan's decision.
Continue to expect higher listed price in H111
We expect contract steel prices to rise in H1 despite a pause in spot price, but see
contract prices tailing off in H2. Baosteel, Hyundai Steel, Tata Steel and Nippon
Steel and Sumitomo Metal remain our most preferred stocks. But with volatile
markets due to the unrest in the Middle East and North Africa, we believe stocks
such as POSCO, which corrected sharply, also look attractive.
India
What happened and what it means:
According to an article in Economic Times, the government is considering
amending the mining tax law (that is, replacing the proposed 26% mining tax
rate with a higher royalty rate [currently 10% ad valorem]).
We had highlighted earlier, based on our channel checks that the mining tax in
its current proposed form of a 26% rate was unlikely to be introduced. However,
the government has yet to clarify on and also the proposed higher royalty rate.
However, we believe the quantum of the hike in the royalty rate is key. We think
a higher royalty rate is more convenient to administer (both for corporates and
the government). Companies will be able to pass on the increase in the royalty
rate to domestic consumers but not to international one (as international prices
prevail).
Our stock call:
Costs for the steel companies will increase. Assuming the royalty rate increases
to 20% (from 10%), we estimate steel companies' cost will increase by US$15/t
(assuming 10% royalty to be cUS$8.5/t which was the royalty cost which
NMDC paid last quarter). Companies will be able to pass on higher costs to
domestic users (especially in the long product segment). We believe this will not
have a material impact on the profitability of steel companies (even is they are
unable to fully pass on cost increases). We have Buy ratings on Tata and JSW
and a Neutral rating on SAIL.
China
What happened and what it means:
The past week was eventful in China: Baosteel raised its March price by
Rmb300 (US$46) and National Bureau of Statistics announced A 4.9% rebased
CPI on 15 February, Beijing announced strict measures on property purchases
on 16 February when steel future and spot prices began to roll over, and there
was a further 50bp hike in the RRR on 18 February, and a 5% increase in the gas
price on the 19th. We think these negative factors have resulted in a cautious
view on the steel sector in China.
Spot prices have been a flux, falling last week given stricter property measures,
a 50bp hike in RRR and some a slight change in sentiment among steel traders.
Prices have stabilised this week, helped by news that Angang and Bengang
raised March prices on 22 February. This follows Baosteel’s decision to raise
prices last week.
Traders' steel inventories continued to rise reaching a record high, much higher
than the H108 peak, despite rising prices. Imported iron ore inventory stabilised
last week, after reaching a record high. Hubert Tang, UBS China steel analyst's
had expected restocking in February; steel and ore inventory rose 6%WoW and
flat WoW to 18mt and 80mt, respectively.
What to look out for:
In light of the recent developments in MENA, how might policy in China
change? The Politburo meeting on 18 February stressed the need to "prevent
large ups and downs" in the economy, which investors seem to have interpreted
as the government will focus on growth, as it is concerned about a hard landing.
The view seems to be that the government is not overly concerned about
inflation as it considers this to be controllable.
We do not expect significant government tightening and believe the government
will remain cautious when it comes to tightening overall lending. UBS continues
to expect RMB new lending to reach about Rmb7trn in 2011. However, we
believe it is too early to consider relaxing the policy.
UBS believes the government has become more vigilant about keeping inflation
and housing prices under control. In addition, it views the earlier-than-expected
rate hike on 7 February as a signal that the government is more concerned about
this. Our economics team expects two more rate hikes in H1, followed by a
possible hike in H2.
Our stock call:
We continue to favour Baosteel and CMR. We think Baosteel has demonstrated
its ability to pass through rising raw material costs, due to its premier product
mix that benefits from China’s demand for high-end steel. CMR differentiates
itself with exposure to upstream raw materials, that is, scrap steel, demand for
which has been rising steadily in the overseas and domestic markets
Japan
What happened and what it means:
BHP seeking monthly pricing for coking coal
Major coking coal producer BHP has asked Japan’s blast furnace steelmakers to
shift to monthly pricing of the coking coal, which are currently priced quarterly.
We believe no decision has been taken at this stage and note that price talks are
scheduled for the first week of March. Still, this looks to be in line with BHP’s
earlier aim of shifting the raw material pricing mechanism to a spot market basis.
The company may call for monthly pricing at the upcoming negotiations.
Domination of high-grade coking coal in the hands of a few mining companies
is intensifying and given that the number of suppliers is limited, the steelmakers
may have to agree. Monthly negotiations seem likely from this April. It appears
that BHP has always wanted to set main raw material prices at short intervals.
Last year, it was decided to set prices every quarter instead of the previous
practice of once a year. Now, BHP is reportedly asking clients to set prices
monthly. BHP may ultimately be seeking to have raw material prices track
market rates, as is the case with contract prices for copper and aluminium. BHP
may make similar requests for iron ore as well.
However, several issues need to be resolved in order to shift to a market price
method. For iron ore, there are the Metal Bulletin’s Indian iron ore prices and
Platts’ spot prices, but they are not ‘well organised,’ unlike the LME, so spot
prices are difficult to track. For coking coal, trading volume in the spot market is
very low, and there is no reliable data. These are some of the issues associated
with a potential switch to a system to track market rates.
Meanwhile, unlike copper and aluminium, steel products tend to be more ‘tailormade’
in terms of size, constituents, and other details for each client. In the
automotive and the shipbuilding industries, steel cost makes up a large
percentage of the entire cost, so clients prefer to keep steel product prices stable
over the long term; revising steel product contract prices at shorter intervals to
track spot material prices do not match the business practice. After all,
steelmakers’ clients have resented setting raw material prices on a quarterly
basis, so it has been agreed with large-lot users to determine prices on a semiannual
basis. The Nikkei reports that setting raw material prices on a monthly
basis could potentially damage the BF industry’s margins.
Key data
In January, Japan’s crude steel output was +10.7% yoy and +5.3% mom (s.a.).
Annualised output was 113.67m tonnes. BF output was +7.8%, EAF -3.5%.
Ordinary steel was +7.2%, specialty steel -0.8%. The prior-year period saw
some issues at JFE BF facilities, and this year there was a rebound from this.
The mom increase reflects a recovery in SMI’s Kashima BF facilities after
operational issues. Demand was solid in Asia, including demand in anticipation
of price hikes. Output at the companies remains at high levels, driven by exports.
Over the past two weeks, not much has happened in the steel product market.
Output costs are expected to rise by roughly ¥3,000/tonne in January-March and
about ¥11,000/tonne in April-June, thus requiring a price hike of c.
¥15,000/tonne. However, so far spot hot rolled sheet price has only risen by
¥4,000/tonne.
Iron ore and coking coal prices have both been somewhat weak more recently,
but they are still at elevated levels.
Ferrous scrap price is falling in the US but trending higher in Japan. Demand is
strong in Asia. Ferrous scrap prices are weak in Europe and China, and overall,
ferrous scrap price—a leading indicator of steel product prices—are trending
higher.
Key indicators
End-December 2010 ordinary steel product inventories grew slightly, due to
stagnant exports amid unfavourable weather in December. This is a temporary
issue about which we have no serious concerns.
Steel product export prices in Japan fell for steel sheet but rose for thick plate in
December 2010. This price trend explains why the steelmakers revised down
their guidance.
Raw material prices remained firm.
What to look out for:
Impact of setting coking coal prices monthly
Given the Japanese BF industry’s business flow, determining prices for the main
raw materials and steel product prices annually seems ideal. Yet, the current
quarterly system is also to the disadvantage for Japanese BF operators in several
aspects.
For iron ore, the contract price for the following quarter equals the average price
of the past three months. Coking coals contract prices are determined by taking
into account the spot price at around the time of price negotiations. Therefore, if
the spot steel price falls after the raw material price is settled at a high level,
then margins would be compressed. Indeed, margins were compressed in Q2 last
year. Settling prices on a quarterly basis could be disadvantageous when steel
product supply-demand is loose, and in our impression it is too much of an inbetween
approach compared to the long-term method and a method reflecting
market rates.
To reflect spot rates, prices should be revised at shorter intervals, and steel
product prices should also be revised more frequently, in which case there could
be more opportunities for BF steelmakers to improve their margins. China-based
Baosteel and South Korea based POSCO revise steel product prices monthly.
Japan’s users resent monthly steel product price revisions at home but not
overseas. Japanese automakers and home appliance makers accept monthly price
changes at their production sites Asia. Resetting steel product prices monthly is
a global trend.
If Japan’s blast-furnace steel manufacturers tell users that they want steel
product prices to be set monthly, users may not agree right away, and
implementation may take some time. Initially, margins could be at risk, and
related newsflow could be negative. However, it could provide steelmakers with
an opportunity to make steel product pricing more transparent and consequently
improve margins. Nonetheless, steel product prices are determined by supplydemand
and forex, so what we really need are perhaps recovery in global
supply-demand conditions and a weaker yen.
Fundamentals
The weather in Queensland Australia has more or less stabilised (despite being
hit by a cyclone), and it now seems less likely that the Japanese BF operators
would have to cut output due to coking coal shortages. Globally, steel product
demand is growing, so output is likely to be maintained at a high level. Yet, the
key issue is the aforementioned metal spread. Globally, there is oversupply, so
even if prices rise, sustainability seems uncertain. Raising domestic prices could
be difficult to negotiate with clients.
Ferrous scrap prices are trending higher again, and margins could be compressed
at Japan’s EAF operators. We therefore believe that there could be further price
hikes.
Korea
What happened and what it means:
Inventory restocking continued in December 2010 with total inventory up 5%
MoM to 3.3mt, largely driven by rising flat steel inventory. Steel mills stated
that demand remains firm YTD, driven more by restocking prior to price hikes.
Mills expect demand to pick up as weather warms up.
Korea net exports continued to expand in December 2010 at 630kt up 273%YoY.
Higher flat product pipe net exports were the key reason behind the increase.
Still Korea remained a net importer in 2010. However, we expect this trend to
reverse in 2011 as Hyundai Steel's #2 blast furnace ramps up production while
POSCO's new Pohang steel mill is built. We believe long steel could turn into
net import for a short period of time in Q1 as traders stock up prior to the
seasonal pick up. But we believe Korea will become structurally a net exporter
from 2011. Korea has been a net importer since 2002, with the exception of
2009.
According to TEX Report, Japan mills plan to offer US$1000/t FOB
(+US$250/t QoQ) for Q2 ship plates to Korea. Although we expect the actual
price to be negotiated lower, we forecast steel prices to rise in Q2 given the cost
push (+cUS$130/t QoQ at current input cost). The offer price is well above
POSCO's listed plate price of US$840/t.
What to look out for:
Korea Express stake sales were launched with the ‘teaser letter’ sent to 10
companies on 16 February. According to Hangkyung, (20 February) the likeliest
contenders are Samsung, POSCO, Lotte, GS and CG group. The deadline for
letters of intent (LOI) is 4 March, and the preliminary bid and shortlist
announcement is to be in March. After the announcement, the selling party
targets to receive final bids in April, select the preferred bidder in mid-May, and
close the deal by end-May. Our analysis of recent acquisition (Hyundai Motor
Group's acquisition of Hyundai E&C) suggests an acquirer's stock
underperforms post submitting LOI but after being priced in, tends to move with
fundamentals. Share prices tend to rise post deal, regardless of winning or losing
the bid, as overhang is resolved.
Our stock call:
Our top pick in Korea is Hyundai Steel given strong earnings and structural
growth.
But with volatile markets due to unrest in MENA, we believe stocks that have
corrected sharply such as POSCO also look attractive. The stock is trading at
0.9x 2011E P/BV (excluding treasury shares) compared with its historical range
of 0.9-1.2x, and consensus has a negative view. We reiterate our view that it is
the best period to buy cyclical stocks such as POSCO, when consensus is
bearish.
Taiwan
What happened and what it means:
On 21 February, Dragon Steel, a subsidiary of China Steel, announced it was
raising the billet price by NT$1,000/ton to NT$25,200/ton, based rising
international billet and scrap prices. We expect other billet producers in Taiwan
to follow suit.
Feng Hsin iron & Steel (2015.TW) raised its official weekly price quote on
domestic rebar products by NT$300/ton post the Lunar New Year (LNY)
holiday. This price quote is flat at NT$21,300/ton for rebar and NT$22,600/ton
for section steel. Tung Ho Steel has raised its domestic price quote for section
steel for three times since 2011.
What to look out for:
China Steel is to announce its contract price for April-May on 24 February. We
expect China Steel to raise prices by US$50-70/t (NT$1,500-2,100/t), below our
previous expectation of US$70-100/t given softening sentiment in China and
push back from customers. The representatives from the Taiwan Fastener
Trading Association had a meeting with China Steel and expressed their hopes
that the price rise for wire rod would be less than NT$2,000/ton, considering
cost competitiveness of downstream producers.
Our stock call:
We believe a rising steel price could provide support for China Steel in the near
term. But we believe the sentiment could weaken in H211 as raw material prices
fall while inventory restocking is completed.
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