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UBS Investment Research
Asia Steel Insights
Demand, not supply the problem in Japan
Japan: Demand shortage bigger problem than supply disruption
Takeaways from our visit to Japan: 1) demand disruption bigger problem,
especially auto production (30-40% of BF demand) to run at only 50-85% of
capacity until Sep; 2) steel mills mostly back on line, although SMI's Kashima will
take time (plate mill restarted); 3) as supply>demand, Japan mills are seeking to
raise exports to Asia but may need to cut output given sluggish price.
China: Output continues to be at record high; Baosteel cuts prices
Mar 11-20 crude steel output run rate is at record high 1.945mt/day or 710mt
annualized. PBOC raised rates by 25bps while Baosteel cut May prices by 4-5%.
But spot prices are up 1-2% since Mar22 given seasonality, continued loss and
rising cost. We view Apr output cuts possible as some mills plan to pull forward
maintenance shutdown given softer demand. We see downside risk to spot prices.
Key issues to watch: Pricing and results
We expect CSC to release flat June price on 15Apr. We still await POSCO's long
awaited price hike (UBS +US$120-130/t). Q1 results will start off with POSCO on
22Apr, whose results we expect to miss. UBS will host trips to Yangzhou and
Wuhan to gauge the feel for China social housing construction. Stay tuned in.
Cautious on steel market near term
Our trip to Japan has reaffirmed our near term cautious view. We prefer HSC,
Baosteel and Tata Steel. We expect CSC to be defensive given dividend (ex div
July) while we see near term negative catalyst for POSCO. Ally Chen, UBS
Taiwan EAF analyst, initiated coverage of Feng Hsin with a Buy rating and Tung
Ho with a Neutral rating.
India
What happened and what it means:
The Supreme Court of India lifted the iron ore export ban effective 20 April
2011. The ban has been in place in Karnataka since August 2010. This will
increase c24mtpa of iron ore exports from India. However, the most active
period for India’s seaborne trade (November-March) has passed and there are
only a few weeks of trade left before the monsoon season begins. Hence, we
believe there will not be a significant impact on the spot market in the near term.
For the global industry: 1) Globally, most capacity expansion is now largely
taking place in India - China is done with its capacity expansions; 2) China will
incrementally modernize/shutdown older plants and its capacity will stabilize at
c700mt; 3) Europe is facing issues on rising costs, environment related issues,
skills and will see shutdowns in BF. For India: 1) Most Greenfield expansions
are facing issues - Posco, ArcelorMittal, Tata Steel (Orissa); 2) Does not believe
there will be overcapacity in the Indian flat market in the next 2 years because of
strong domestic demand (c10%) and import substitution.
Our stock call:
We prefer stocks that have upfront volume growth and raw material integration.
We prefer Tata Steel (2.9mt volume growth, vertical integration at Corus) and
JSW (cheap and has 3.2mt volume growth). We are Neutral on SAIL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia Steel Insights
Demand, not supply the problem in Japan
Japan: Demand shortage bigger problem than supply disruption
Takeaways from our visit to Japan: 1) demand disruption bigger problem,
especially auto production (30-40% of BF demand) to run at only 50-85% of
capacity until Sep; 2) steel mills mostly back on line, although SMI's Kashima will
take time (plate mill restarted); 3) as supply>demand, Japan mills are seeking to
raise exports to Asia but may need to cut output given sluggish price.
China: Output continues to be at record high; Baosteel cuts prices
Mar 11-20 crude steel output run rate is at record high 1.945mt/day or 710mt
annualized. PBOC raised rates by 25bps while Baosteel cut May prices by 4-5%.
But spot prices are up 1-2% since Mar22 given seasonality, continued loss and
rising cost. We view Apr output cuts possible as some mills plan to pull forward
maintenance shutdown given softer demand. We see downside risk to spot prices.
Key issues to watch: Pricing and results
We expect CSC to release flat June price on 15Apr. We still await POSCO's long
awaited price hike (UBS +US$120-130/t). Q1 results will start off with POSCO on
22Apr, whose results we expect to miss. UBS will host trips to Yangzhou and
Wuhan to gauge the feel for China social housing construction. Stay tuned in.
Cautious on steel market near term
Our trip to Japan has reaffirmed our near term cautious view. We prefer HSC,
Baosteel and Tata Steel. We expect CSC to be defensive given dividend (ex div
July) while we see near term negative catalyst for POSCO. Ally Chen, UBS
Taiwan EAF analyst, initiated coverage of Feng Hsin with a Buy rating and Tung
Ho with a Neutral rating.
India
What happened and what it means:
The Supreme Court of India lifted the iron ore export ban effective 20 April
2011. The ban has been in place in Karnataka since August 2010. This will
increase c24mtpa of iron ore exports from India. However, the most active
period for India’s seaborne trade (November-March) has passed and there are
only a few weeks of trade left before the monsoon season begins. Hence, we
believe there will not be a significant impact on the spot market in the near term.
For the global industry: 1) Globally, most capacity expansion is now largely
taking place in India - China is done with its capacity expansions; 2) China will
incrementally modernize/shutdown older plants and its capacity will stabilize at
c700mt; 3) Europe is facing issues on rising costs, environment related issues,
skills and will see shutdowns in BF. For India: 1) Most Greenfield expansions
are facing issues - Posco, ArcelorMittal, Tata Steel (Orissa); 2) Does not believe
there will be overcapacity in the Indian flat market in the next 2 years because of
strong domestic demand (c10%) and import substitution.
Our stock call:
We prefer stocks that have upfront volume growth and raw material integration.
We prefer Tata Steel (2.9mt volume growth, vertical integration at Corus) and
JSW (cheap and has 3.2mt volume growth). We are Neutral on SAIL.
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