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UBS Investment Research
Asia Steel Insights
Expect steel prices to rise
Nippon Steel(NSC)+Sumitomo Metal(SMI). What does it mean?
If NSC and SMI merges, the new entity would be 2nd largest in the world on
parent basis with 4% share (2010). We do not expect greater bargaining power
against miners, less competition nor shutdown from the merger. But we view this
start of further consolidation, especially in China where momentum is slowly
gaining in recent years.
Little damage from Cyclone Yasi; But some rain forecasted
Met coal price slid to US$348/t (YTD peak US$383/t) as ports and mines reopen in
QSL after suffering minimal damage from Cyclone Yasi. Scrap prices are also
softening. Still, iron ore prices remain at record levels (US$180/t). Dec-Feb MTD
average input price implies steel making cost to rise cUS$100/t for Q2 contracts.
Key issues to watch
We believe steel prices to rally post Lunar Near Year given seasonal pickup,
inventory restock and cost push. SBB notes that 1Q Japan HRC export price to
Korea rose 4-8% to US$700/t. We expect POSCO to cut discount by cUS$45/t,
similar to HSC, while we believe China Steel to raise Apr-May prices by
cUS$100/t on 24Feb.
Stock view: Time to have a look at POSCO
Our top picks are Baosteel, HSC and Tata Steel. But view POSCO attractive near
term given rising steel price, beaten down valuations (0.9x 11E PB vs. historic
range 0.9-1.2x) and consensus negative view on the stock. We add NSC/SMI as
most and Kobe as least preferred in JP, removing Sanyo Specialty and SMI
India
What happened and what it means:
Steel Authority of India (SAIL) raised thermo-mechanically treated (TMT) rebar
price by US$43/t (Rs2,000/t) on 1 February to US$824-833/t (Rs37,600-
38,000/t) excluding tax. SBB states the price hike is due to rising cost and higher
secondary prices. Rashtiya Ispat Nigam Limited (RINL) also raised TMT rebar
price from 1 February by US$16/t (Rs750/t) to US$897/t including 10.3% excise
duty but excluding VAT. RINL had already raised TMT rebar prices by US$16/t
on 20 January.
According to Metal Bulletin, HRC prices rose sharply to US$828/t (37,750Rs/t)
up 9.0% WoW on Feb 4th. Previously JSW lifted its HRC price for the third time
in January (US$767/t) but states it is contemplating on additional hikes in
February.
POSCO finally received India's Environment Minister's approval for the first
phase of POSCO's Orissa steel mill project. POSCO will restart land acquisition
and compensation/moving of residents. The approval is for the 12mt steel plant
and is separate from iron ore prospecting license. India's Supreme Court is to
announce its ruling on the prospecting license in 1H2012.
What to look out for:
Tata Steel is to report results on 15 February.
Our stock call:
We believe recent correction (up to 23% in last 3 months) in the Indian steel
sector presents a selective buying opportunity. Sector has underperformed given
rising cost. But we believe this is already priced in and view any increase in
steel prices to act as a positive catalyst. In this environment we prefer companies
with upfront volume growth, raw material integration (in that order). Our
preferred picks are Tata Steel and JSW Steel. We are Neutral on SAIL.
China
What happened and what it means:
On 31 January, just before the Lunar New Year, shipment prices at Chinese
mills adjusted slightly. We forecast a firm market trend after the holidays on
seasonal demand growth and rising raw material prices, but see a risk that
market sentiment may worsen on monetary tightening.
The PBC announced on 8 February that it will raise benchmark lending and
deposit rates by 25 bps effective 9 February. This raises 1-year deposit rate to
3% and 1-year lending rate to 6.06%. The rate hike is largely expected as market
expects front-loaded rate hike pattern this year, especially given January CPI
having picked up to 5.4% and 1H expected to average 5.2%.
January bank lending increased by RMB 1350 bn. As usual, banks rushed out
lending in the first couple of week of 2011, to clear some of the backlog projects.
Despite the RRR hike and liquidity squeeze in the second half of January, we
estimate that net new lending reached 1350 billion RMB
What to look out for:
CPI inflation has been mainly led by food but prices of less weather sensitive
items have increase. Tao Wang, UBS China Economist, expects 1H inflation to
remain at 5.2%. Given this expected inflation path, the government has reconfirmed
that they will put stabilizing prices as the top priority in the near term.
In addition to rate hikes, which at 25 bps a go, serves mainly as a signaling
effect, we think the government will continue to keep a close watch at bank
lending. A more important issue to watch in the next couple of days will be the
short-term inter-bank interest rates. We expect rate to come down from the 8%+
level before the new year, which should help relieve some concerns in the
market.
We believe consolidation has been slowly gaining momentum on the ground in
recent years and view potential merger between Nippon Steel (NSC) and
Sumitomo Metals (SMI) to be positive. There are two major obstacles to China's
consolidation effort: 1) local government's unwillingness to sacrifice tax revenue
and GDP growth; and 2) China’s dependency on investment-driven growth in 11
FYP. But going forward, we expect positive changes as: 1) local government
reshuffle in 12 FYP means less political resistance; and 2) China’s transition in
will likely still be led by large SOE mills including: 1) Baosteel + Bayi +
Ningbo Steel + Guangzhou Steel; and 2) Angang + Bengang + Pangang +
Lingang.
Our stock call:
We continue to prefer Baosteel and CMR. Baosteel has demonstrated its ability
to pass through rising raw material costs, due to its premier product mix that
benefits from China’s demand upgrade. CMR differentiates itself with exposure
to upstream raw materials, i.e. scrap steel, whose demand has been rising
steadily in both overseas and domestic markets
Japan
What happened and what it means:
Nippon Steel and Sumitomo Metal announced a merger
Nippon Steel and Sumitomo Metal Industries have begun to consider a merger.
They aim for integration through the formation of a holding company. The
merger ratio, the surviving company, and how the group units will be affected
have not been determined yet. The companies do not yet have any figures for
expected synergies. We like the move as a first step toward improving earnings
in Japan’s steel industry, where competition has intensified and materials
sourcing conditions have worsened. We recently upgraded our ratings on
Nippon Steel and SMI from Neutral to Buy.
The planned merger differs from the bailout-type mergers in the 1990s and the
hostile takeovers in the mid-2000s in the global steel industry. We think Nippon
Steel and Sumitomo Metal decided on the merger after making major
compromises, so as to be better able to compete in the growing Asian market
with their technologies.
Steelmakers’ Q3 results
Four blast furnace steelmakers, four speciality steelmakers, and two EAF
ordinary steelmakers have announced their results. As forecast, Nippon Steel,
JFE, and SMI revised down their guidance. At Nippon Steel and JFE, domestic
and overseas price declines for hot-rolled coil depressed earnings. At SMI,
earnings declined sharply owing to restructuring losses at SUMCO and a one-off
impact from some problems at a blast furnace. Kobe Steel maintained its
conservative guidance, while the company’s diversified operations are firm. We
thus see a possibility of an upward revision. Kobe Steel is relatively firm among
the four blast furnace steelmakers, while the four speciality steelmakers are
trending strongly. Daido Steel and Hitachi Metals have maintained their
guidance, but are likely to revise up going forward, in our view. EAF ordinary
steelmakers revised down their projections, as forecast.
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:
The combined entity (Nippon Steel + SMI)
Based on 2009 figures, the combined entity (Nippon Steel + Sumitomo Metal
Industries) would be the second largest crude steel producer in the world on a
parent basis and the fourth largest on a group basis. The combined entity’s
global market share in 2010 is estimated at slightly less than 4%. The two
companies are not likely to have greater combined bargaining power over
materials suppliers because the top three suppliers dominate, with almost 70% of
the market. In addition, competition is unlikely to ease up as a result of the
merger because there are many steel companies competing for business.
However, we think a merger between the two is logical in that they have
complementary businesses. Nippon Steel produces a wide range of steel
products, from steel sheets to construction materials, and has world-leading
technologies in auto-use flat products. The steel sheets it produces include tin
plate as well as electromagnetic steel sheet for hybrid cars. Sumitomo Metal also
produces flat products, but most of them are customized for automotive and
home appliance/electronics applications. Its speciality is seamless pipes, which
we think have good long-term growth prospects. In the railway steel area, the
two companies are likely to generate synergies in terms of winning orders, as
Nippon Steel is Japan’s leading producer of railway track and as Sumitomo
Metal has the entire market for railway car wheels.
Both companies’ steel mills are running at close to full capacity. By contrast,
when JFE was formed (via a merger), removing excess capacity was a major
theme for the industry. We therefore do not expect much capacity consolidation,
but there could be some synergies in terms of lot consolidation, the elimination
of overlapping investments, reduction of headquarters costs, and the integration
of overseas investments. For example, if the two companies produce steel
products for a specific customer at the same mill, they should be able to save
costs. The elimination of overlapping investments and the integration of
overseas investments could also generate sizable synergies.
Although their bargaining power in terms of raw materials purchases may not
improve, they could benefit by jointly developing mines. The advantages of
avoiding duplicate investments in the construction of overseas steel mills would
likely be substantial as well.
The two entities are planning to build blast furnaces overseas. We believe their
overseas strategies could be enhanced, particularly in India and other regions
where demand is growing.
The key risk factor in the planned merger may be the Japan Fair Trade
Commission.
Market impact
Kobe Steel, an alliance partner, will not merge with the two because of the Anti-
Monopoly Law. Strategies at Kobe Steel, Nisshin Steel (a Nippon Steel group
firm) and key rival JFE should be worth monitoring from here. These firms are
likely to remain independent for a while, but there could be further integrations
over the long term. Globally, margins in the steel industry are shrinking, and we
think there could be further progress in rationalisation, particularly in China.
Earnings results
In response to the merger news, share prices rose, but the near-term earnings
outlook is not bright. Raw materials prices are expected to rise sharply from this
April at the blast furnace operators, while steel product price hikes are being
delayed.
Speciality steel shipment volumes are firm, but margin erosion is not a concern
because of the surcharge system.
The worst may soon be over for the EAF operators, but business conditions are
likely to remain difficult alongside sluggish demand.
Fundamentals
The main raw materials prices continue to appreciate. Meanwhile, due partly to
anticipatory demand, steel product prices are also trending higher. However,
once raw materials prices are set at high levels, steel product prices could turn
lower.
Korea
What happened and what it means:
As expected, steel mills are raising prices to offset rising cost. KISCO
(104700.KS) announced on 7 February that it will raise rebar prices by US$45/t
to US$782/t. Rebar has been a contentious point between construction
companies and steel mills, but KISCO has taken the lead by raising prices as it
posted its first annual operating loss in 30 years.
After cutting HRC discount by US$27/t from January, Dongbu Steel announced
price discount to be cut by US$45/t from February, effectively raising HRC
price by US$82/t. Hyundai Steel had cut HRC discount by US$45/t from
January, and we believe further discount cuts/price hikes possible as cost is to
rise by cUS$100/t if 2Q contract raw materials are used.
Steel Business Briefing (SBB) reports that Korean users have agreed on
US$700/t FOB for 1Q2011 (Jan-Mar) Japan HRC imports, with some re-rollers
agreeing to pay higher price for March delivery. The price is 4-8% hike from
previous quarter's US$650-670/t. SBB states that Japan mills are still unsatisfied
with the price hike and is looking for an additional US$30-50/t FOB price hike
for March, if not in 2Q11.
POSCO finally received India's Environment Minister's approval for POSCO's
Orissa steel mill project. POSCO will restart land acquisition and
compensation/moving of residents. The approval is for the 12mt steel plant and
is separate from iron ore prospecting license. India's Supreme Court is to
announce its ruling on the prospecting license in 1H2012.
What to look out for:
Following price hikes by Hyundai Steel, Dongbu Steel and Japan imports, we
believe POSCO will also follow suite soon by raising steel prices by US$45/t to
cUS$810-820/t. The December - February YTD average raw material prices
imply steel making cost to rise by US$100/t if only Q2 raw material contracts
are used. But as mills carry lower cost Q1 inventory, we believe weighted
average cost hike in Q2 would be closer to US$70/t. We believe mills will try to
raise prices to that level in 1H2011 to pass on cost.
Our stock call:
Our top pick in Korea is Hyundai Steel given strong earnings and structural
growth.
But we believe POSCO looks attractive near term given rising steel price, beaten
down valuations (0.9x 11E PB vs. historic range 0.9-1.2x) and consensus
negative view on the stock. We believe best period to buy cyclical stocks like
POSCO is when market is consensus bear.
Taiwan
What happened and what it means:
The construction of Suhua Highway was officially kicked off on January 30,
2011. This is the major highway at the east coast of Taiwan with total
government budget at NT$NT$49bn. Total government infrastructure budget for
2011 will stay firm at NT$519bn (vs. NT$518bn in 2010). Major infrastructure
projects including more metro lines in the New Taipei City, the reconstruction
of the international airport, etc. will support domestic construction demand in
2011.
On the first day returning from Lunar New Year (LNY) holiday, Feng Hsin Iron
& Steel (2015.TW) has not made its official weekly price quote on domestic
rebar products, as expected by the market. The company states uncertain rebar
pricing as a reason, given uncertain iron ore and coal price outlook. Feng Hsin
has cut prices by US$10/t in January after keeping price flat since December
given softening scrap prices and lull in demand around LNY holiday.
What to look out for:
We expect China Steel (2002.TW) to raise April-May domestic contract price by
US$70-100/t given rising cost. Prices are to be announced on 24 February. We
believe the price hike to be accretive to Q2 profits as price hike would occur
before higher cost raw material are used.
Our stock call:
We believe rising steel price could provide support for China Steel near term.
But we believe market could weaken in 2H2011 as raw material price retract
while inventory restock finishes.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia Steel Insights
Expect steel prices to rise
Nippon Steel(NSC)+Sumitomo Metal(SMI). What does it mean?
If NSC and SMI merges, the new entity would be 2nd largest in the world on
parent basis with 4% share (2010). We do not expect greater bargaining power
against miners, less competition nor shutdown from the merger. But we view this
start of further consolidation, especially in China where momentum is slowly
gaining in recent years.
Little damage from Cyclone Yasi; But some rain forecasted
Met coal price slid to US$348/t (YTD peak US$383/t) as ports and mines reopen in
QSL after suffering minimal damage from Cyclone Yasi. Scrap prices are also
softening. Still, iron ore prices remain at record levels (US$180/t). Dec-Feb MTD
average input price implies steel making cost to rise cUS$100/t for Q2 contracts.
Key issues to watch
We believe steel prices to rally post Lunar Near Year given seasonal pickup,
inventory restock and cost push. SBB notes that 1Q Japan HRC export price to
Korea rose 4-8% to US$700/t. We expect POSCO to cut discount by cUS$45/t,
similar to HSC, while we believe China Steel to raise Apr-May prices by
cUS$100/t on 24Feb.
Stock view: Time to have a look at POSCO
Our top picks are Baosteel, HSC and Tata Steel. But view POSCO attractive near
term given rising steel price, beaten down valuations (0.9x 11E PB vs. historic
range 0.9-1.2x) and consensus negative view on the stock. We add NSC/SMI as
most and Kobe as least preferred in JP, removing Sanyo Specialty and SMI
India
What happened and what it means:
Steel Authority of India (SAIL) raised thermo-mechanically treated (TMT) rebar
price by US$43/t (Rs2,000/t) on 1 February to US$824-833/t (Rs37,600-
38,000/t) excluding tax. SBB states the price hike is due to rising cost and higher
secondary prices. Rashtiya Ispat Nigam Limited (RINL) also raised TMT rebar
price from 1 February by US$16/t (Rs750/t) to US$897/t including 10.3% excise
duty but excluding VAT. RINL had already raised TMT rebar prices by US$16/t
on 20 January.
According to Metal Bulletin, HRC prices rose sharply to US$828/t (37,750Rs/t)
up 9.0% WoW on Feb 4th. Previously JSW lifted its HRC price for the third time
in January (US$767/t) but states it is contemplating on additional hikes in
February.
POSCO finally received India's Environment Minister's approval for the first
phase of POSCO's Orissa steel mill project. POSCO will restart land acquisition
and compensation/moving of residents. The approval is for the 12mt steel plant
and is separate from iron ore prospecting license. India's Supreme Court is to
announce its ruling on the prospecting license in 1H2012.
What to look out for:
Tata Steel is to report results on 15 February.
Our stock call:
We believe recent correction (up to 23% in last 3 months) in the Indian steel
sector presents a selective buying opportunity. Sector has underperformed given
rising cost. But we believe this is already priced in and view any increase in
steel prices to act as a positive catalyst. In this environment we prefer companies
with upfront volume growth, raw material integration (in that order). Our
preferred picks are Tata Steel and JSW Steel. We are Neutral on SAIL.
China
What happened and what it means:
On 31 January, just before the Lunar New Year, shipment prices at Chinese
mills adjusted slightly. We forecast a firm market trend after the holidays on
seasonal demand growth and rising raw material prices, but see a risk that
market sentiment may worsen on monetary tightening.
The PBC announced on 8 February that it will raise benchmark lending and
deposit rates by 25 bps effective 9 February. This raises 1-year deposit rate to
3% and 1-year lending rate to 6.06%. The rate hike is largely expected as market
expects front-loaded rate hike pattern this year, especially given January CPI
having picked up to 5.4% and 1H expected to average 5.2%.
January bank lending increased by RMB 1350 bn. As usual, banks rushed out
lending in the first couple of week of 2011, to clear some of the backlog projects.
Despite the RRR hike and liquidity squeeze in the second half of January, we
estimate that net new lending reached 1350 billion RMB
What to look out for:
CPI inflation has been mainly led by food but prices of less weather sensitive
items have increase. Tao Wang, UBS China Economist, expects 1H inflation to
remain at 5.2%. Given this expected inflation path, the government has reconfirmed
that they will put stabilizing prices as the top priority in the near term.
In addition to rate hikes, which at 25 bps a go, serves mainly as a signaling
effect, we think the government will continue to keep a close watch at bank
lending. A more important issue to watch in the next couple of days will be the
short-term inter-bank interest rates. We expect rate to come down from the 8%+
level before the new year, which should help relieve some concerns in the
market.
We believe consolidation has been slowly gaining momentum on the ground in
recent years and view potential merger between Nippon Steel (NSC) and
Sumitomo Metals (SMI) to be positive. There are two major obstacles to China's
consolidation effort: 1) local government's unwillingness to sacrifice tax revenue
and GDP growth; and 2) China’s dependency on investment-driven growth in 11
FYP. But going forward, we expect positive changes as: 1) local government
reshuffle in 12 FYP means less political resistance; and 2) China’s transition in
will likely still be led by large SOE mills including: 1) Baosteel + Bayi +
Ningbo Steel + Guangzhou Steel; and 2) Angang + Bengang + Pangang +
Lingang.
Our stock call:
We continue to prefer Baosteel and CMR. Baosteel has demonstrated its ability
to pass through rising raw material costs, due to its premier product mix that
benefits from China’s demand upgrade. CMR differentiates itself with exposure
to upstream raw materials, i.e. scrap steel, whose demand has been rising
steadily in both overseas and domestic markets
Japan
What happened and what it means:
Nippon Steel and Sumitomo Metal announced a merger
Nippon Steel and Sumitomo Metal Industries have begun to consider a merger.
They aim for integration through the formation of a holding company. The
merger ratio, the surviving company, and how the group units will be affected
have not been determined yet. The companies do not yet have any figures for
expected synergies. We like the move as a first step toward improving earnings
in Japan’s steel industry, where competition has intensified and materials
sourcing conditions have worsened. We recently upgraded our ratings on
Nippon Steel and SMI from Neutral to Buy.
The planned merger differs from the bailout-type mergers in the 1990s and the
hostile takeovers in the mid-2000s in the global steel industry. We think Nippon
Steel and Sumitomo Metal decided on the merger after making major
compromises, so as to be better able to compete in the growing Asian market
with their technologies.
Steelmakers’ Q3 results
Four blast furnace steelmakers, four speciality steelmakers, and two EAF
ordinary steelmakers have announced their results. As forecast, Nippon Steel,
JFE, and SMI revised down their guidance. At Nippon Steel and JFE, domestic
and overseas price declines for hot-rolled coil depressed earnings. At SMI,
earnings declined sharply owing to restructuring losses at SUMCO and a one-off
impact from some problems at a blast furnace. Kobe Steel maintained its
conservative guidance, while the company’s diversified operations are firm. We
thus see a possibility of an upward revision. Kobe Steel is relatively firm among
the four blast furnace steelmakers, while the four speciality steelmakers are
trending strongly. Daido Steel and Hitachi Metals have maintained their
guidance, but are likely to revise up going forward, in our view. EAF ordinary
steelmakers revised down their projections, as forecast.
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:
The combined entity (Nippon Steel + SMI)
Based on 2009 figures, the combined entity (Nippon Steel + Sumitomo Metal
Industries) would be the second largest crude steel producer in the world on a
parent basis and the fourth largest on a group basis. The combined entity’s
global market share in 2010 is estimated at slightly less than 4%. The two
companies are not likely to have greater combined bargaining power over
materials suppliers because the top three suppliers dominate, with almost 70% of
the market. In addition, competition is unlikely to ease up as a result of the
merger because there are many steel companies competing for business.
However, we think a merger between the two is logical in that they have
complementary businesses. Nippon Steel produces a wide range of steel
products, from steel sheets to construction materials, and has world-leading
technologies in auto-use flat products. The steel sheets it produces include tin
plate as well as electromagnetic steel sheet for hybrid cars. Sumitomo Metal also
produces flat products, but most of them are customized for automotive and
home appliance/electronics applications. Its speciality is seamless pipes, which
we think have good long-term growth prospects. In the railway steel area, the
two companies are likely to generate synergies in terms of winning orders, as
Nippon Steel is Japan’s leading producer of railway track and as Sumitomo
Metal has the entire market for railway car wheels.
Both companies’ steel mills are running at close to full capacity. By contrast,
when JFE was formed (via a merger), removing excess capacity was a major
theme for the industry. We therefore do not expect much capacity consolidation,
but there could be some synergies in terms of lot consolidation, the elimination
of overlapping investments, reduction of headquarters costs, and the integration
of overseas investments. For example, if the two companies produce steel
products for a specific customer at the same mill, they should be able to save
costs. The elimination of overlapping investments and the integration of
overseas investments could also generate sizable synergies.
Although their bargaining power in terms of raw materials purchases may not
improve, they could benefit by jointly developing mines. The advantages of
avoiding duplicate investments in the construction of overseas steel mills would
likely be substantial as well.
The two entities are planning to build blast furnaces overseas. We believe their
overseas strategies could be enhanced, particularly in India and other regions
where demand is growing.
The key risk factor in the planned merger may be the Japan Fair Trade
Commission.
Market impact
Kobe Steel, an alliance partner, will not merge with the two because of the Anti-
Monopoly Law. Strategies at Kobe Steel, Nisshin Steel (a Nippon Steel group
firm) and key rival JFE should be worth monitoring from here. These firms are
likely to remain independent for a while, but there could be further integrations
over the long term. Globally, margins in the steel industry are shrinking, and we
think there could be further progress in rationalisation, particularly in China.
Earnings results
In response to the merger news, share prices rose, but the near-term earnings
outlook is not bright. Raw materials prices are expected to rise sharply from this
April at the blast furnace operators, while steel product price hikes are being
delayed.
Speciality steel shipment volumes are firm, but margin erosion is not a concern
because of the surcharge system.
The worst may soon be over for the EAF operators, but business conditions are
likely to remain difficult alongside sluggish demand.
Fundamentals
The main raw materials prices continue to appreciate. Meanwhile, due partly to
anticipatory demand, steel product prices are also trending higher. However,
once raw materials prices are set at high levels, steel product prices could turn
lower.
Korea
What happened and what it means:
As expected, steel mills are raising prices to offset rising cost. KISCO
(104700.KS) announced on 7 February that it will raise rebar prices by US$45/t
to US$782/t. Rebar has been a contentious point between construction
companies and steel mills, but KISCO has taken the lead by raising prices as it
posted its first annual operating loss in 30 years.
After cutting HRC discount by US$27/t from January, Dongbu Steel announced
price discount to be cut by US$45/t from February, effectively raising HRC
price by US$82/t. Hyundai Steel had cut HRC discount by US$45/t from
January, and we believe further discount cuts/price hikes possible as cost is to
rise by cUS$100/t if 2Q contract raw materials are used.
Steel Business Briefing (SBB) reports that Korean users have agreed on
US$700/t FOB for 1Q2011 (Jan-Mar) Japan HRC imports, with some re-rollers
agreeing to pay higher price for March delivery. The price is 4-8% hike from
previous quarter's US$650-670/t. SBB states that Japan mills are still unsatisfied
with the price hike and is looking for an additional US$30-50/t FOB price hike
for March, if not in 2Q11.
POSCO finally received India's Environment Minister's approval for POSCO's
Orissa steel mill project. POSCO will restart land acquisition and
compensation/moving of residents. The approval is for the 12mt steel plant and
is separate from iron ore prospecting license. India's Supreme Court is to
announce its ruling on the prospecting license in 1H2012.
What to look out for:
Following price hikes by Hyundai Steel, Dongbu Steel and Japan imports, we
believe POSCO will also follow suite soon by raising steel prices by US$45/t to
cUS$810-820/t. The December - February YTD average raw material prices
imply steel making cost to rise by US$100/t if only Q2 raw material contracts
are used. But as mills carry lower cost Q1 inventory, we believe weighted
average cost hike in Q2 would be closer to US$70/t. We believe mills will try to
raise prices to that level in 1H2011 to pass on cost.
Our stock call:
Our top pick in Korea is Hyundai Steel given strong earnings and structural
growth.
But we believe POSCO looks attractive near term given rising steel price, beaten
down valuations (0.9x 11E PB vs. historic range 0.9-1.2x) and consensus
negative view on the stock. We believe best period to buy cyclical stocks like
POSCO is when market is consensus bear.
Taiwan
What happened and what it means:
The construction of Suhua Highway was officially kicked off on January 30,
2011. This is the major highway at the east coast of Taiwan with total
government budget at NT$NT$49bn. Total government infrastructure budget for
2011 will stay firm at NT$519bn (vs. NT$518bn in 2010). Major infrastructure
projects including more metro lines in the New Taipei City, the reconstruction
of the international airport, etc. will support domestic construction demand in
2011.
On the first day returning from Lunar New Year (LNY) holiday, Feng Hsin Iron
& Steel (2015.TW) has not made its official weekly price quote on domestic
rebar products, as expected by the market. The company states uncertain rebar
pricing as a reason, given uncertain iron ore and coal price outlook. Feng Hsin
has cut prices by US$10/t in January after keeping price flat since December
given softening scrap prices and lull in demand around LNY holiday.
What to look out for:
We expect China Steel (2002.TW) to raise April-May domestic contract price by
US$70-100/t given rising cost. Prices are to be announced on 24 February. We
believe the price hike to be accretive to Q2 profits as price hike would occur
before higher cost raw material are used.
Our stock call:
We believe rising steel price could provide support for China Steel near term.
But we believe market could weaken in 2H2011 as raw material price retract
while inventory restock finishes.
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