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UBS Investment Research
Asia Steel Insights
S trong headwinds but priced in
Asia steel market anything but strong
Steel price in China remains weak despite Baosteel's flat November domestic price.
We expect China steel output to slow as even small mills are losing money. The
Japan steel market is gradually worsening given strong JPY and inflows of cheap
imports. Korea rebar prices tumbled. Weak currencies have raised domestic steel
prices in Korea and India but so has imported raw materials price.
Initiated JSPL with an anti-consensus Sell rating
Navin Gupta, UBS India Metals & Mining analyst, initiated coverage on Jindal
Steel & Power (JSPL) with a Sell rating and a price target of Rs470 as: 1) JSPL’s
capacity expansion faces significant execution challenges; and 2) its valuation
looks stretched.
Key issues to watch: Q3 to disappoint; CSC December price
We expect Hyundai Steel and Dongkuk Steel to report losses, and Angang to be
near breakeven in Q3. We expect NSC/JFE to be weak while POSCO profits fall
on weak demand and FX loss (UBS to host POSCO result conference on 21
October). Worth noting is Bayi Steel's Q3 which may be in line with expectations
on strong FAI. It will be interesting to see how China Steel (CSC) sets its
December domestic price on 19 October.
Cautious on sector fundamentals but well reflected in share price
We expect steel prices to fall in 2012 with margin likely to deteriorate. However,
we believe the share prices have reflected much of the negative news already.
Hence, we upgraded Angang, Maanshan, and Hyundai Steel to Buy largely on
valuation. We downgraded Tata Steel to Neutral given risk from Corus. CMR,
Daido Steel, and Feng Hsin are our top picks. We least prefer China Steel, SAIL
and Kobe Steel.
India
What happened and what it means:
Indian HRC steel prices were up by Rs1,500/t (cUS$30) in September last week,
largely driven by a depreciating rupee (current USDINR - 49 vs 45.4 in August
1st week). Offers for HRC were at Rs36,250-Rs37,250 (US$737- US$757)
according to Metal Bulletin. However, the demand has been soft over the last 4-
5 months.
Our stock call:
Currently our only Buy idea in the Indian steel names is JSW Steel, while we
have a neutral on Tata Steel. SAIL is our least preferred stock. We also have a
Sell on JSPL due to concerns on execution & valuation .
We recently initiated coverage of Jindal Steel & Power Limted (JSPL) with an
anti-consensus Sell Rating and a PT of Rs470. JSPL is an integrated steel
producer and also has a profitable power business. It's current steel capacity is
3mtpa. We think the operational synergy derived from JSPL’s integrated
business model is a key strength. But, despite a share price correction YTD, we
believe the risk/reward profile is unfavorable as 1) JSPL’s capacity expansion
faces significant execution challenges, and 2) its valuation looks stretched. We
derive our price target from a sum-of-the-parts valuation - power contributes
Rs285 and steel Rs189.
We recently downgraded Tata Steel to a Neutral and lowered PT to R460 as we:
1) lower EBITDA/T estimates in Corus from US$50/65 to US$22/23, 2) lower
sales volumes in the Indian business in FY13 from 7.9mt given the 2.9mt
Jamshedpur expansion will only be commissioned by Mar 12, 3) also increase
capex estimates to US$2.5bn in FY12/13 each (from US$1.9bn earlier in each
year). We lower our EBITDA estimates by Rs27bn/Rs54bn (-20/-29%) for
FY12-13.
We also recently lowered PT for JSW Steel to Rs700 on concerns of higher iron
ore costs (post the mining ban in the Karnataka state imposed by the SC). Our
current volume estimates for FY12/13 are 6.9/10.2 mt. We factor in iron ore
costs of Rs3,723/Rs4,280 /t in FY12/13 (Rs2,858/t in FY11) as JSW is likely to
buy some ore from Chattisgarh (incurring transport cost). Our current EBITDA/t
estimates for FY12/13 are US$119/151.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia Steel Insights
S trong headwinds but priced in
Asia steel market anything but strong
Steel price in China remains weak despite Baosteel's flat November domestic price.
We expect China steel output to slow as even small mills are losing money. The
Japan steel market is gradually worsening given strong JPY and inflows of cheap
imports. Korea rebar prices tumbled. Weak currencies have raised domestic steel
prices in Korea and India but so has imported raw materials price.
Initiated JSPL with an anti-consensus Sell rating
Navin Gupta, UBS India Metals & Mining analyst, initiated coverage on Jindal
Steel & Power (JSPL) with a Sell rating and a price target of Rs470 as: 1) JSPL’s
capacity expansion faces significant execution challenges; and 2) its valuation
looks stretched.
Key issues to watch: Q3 to disappoint; CSC December price
We expect Hyundai Steel and Dongkuk Steel to report losses, and Angang to be
near breakeven in Q3. We expect NSC/JFE to be weak while POSCO profits fall
on weak demand and FX loss (UBS to host POSCO result conference on 21
October). Worth noting is Bayi Steel's Q3 which may be in line with expectations
on strong FAI. It will be interesting to see how China Steel (CSC) sets its
December domestic price on 19 October.
Cautious on sector fundamentals but well reflected in share price
We expect steel prices to fall in 2012 with margin likely to deteriorate. However,
we believe the share prices have reflected much of the negative news already.
Hence, we upgraded Angang, Maanshan, and Hyundai Steel to Buy largely on
valuation. We downgraded Tata Steel to Neutral given risk from Corus. CMR,
Daido Steel, and Feng Hsin are our top picks. We least prefer China Steel, SAIL
and Kobe Steel.
India
What happened and what it means:
Indian HRC steel prices were up by Rs1,500/t (cUS$30) in September last week,
largely driven by a depreciating rupee (current USDINR - 49 vs 45.4 in August
1st week). Offers for HRC were at Rs36,250-Rs37,250 (US$737- US$757)
according to Metal Bulletin. However, the demand has been soft over the last 4-
5 months.
Our stock call:
Currently our only Buy idea in the Indian steel names is JSW Steel, while we
have a neutral on Tata Steel. SAIL is our least preferred stock. We also have a
Sell on JSPL due to concerns on execution & valuation .
We recently initiated coverage of Jindal Steel & Power Limted (JSPL) with an
anti-consensus Sell Rating and a PT of Rs470. JSPL is an integrated steel
producer and also has a profitable power business. It's current steel capacity is
3mtpa. We think the operational synergy derived from JSPL’s integrated
business model is a key strength. But, despite a share price correction YTD, we
believe the risk/reward profile is unfavorable as 1) JSPL’s capacity expansion
faces significant execution challenges, and 2) its valuation looks stretched. We
derive our price target from a sum-of-the-parts valuation - power contributes
Rs285 and steel Rs189.
We recently downgraded Tata Steel to a Neutral and lowered PT to R460 as we:
1) lower EBITDA/T estimates in Corus from US$50/65 to US$22/23, 2) lower
sales volumes in the Indian business in FY13 from 7.9mt given the 2.9mt
Jamshedpur expansion will only be commissioned by Mar 12, 3) also increase
capex estimates to US$2.5bn in FY12/13 each (from US$1.9bn earlier in each
year). We lower our EBITDA estimates by Rs27bn/Rs54bn (-20/-29%) for
FY12-13.
We also recently lowered PT for JSW Steel to Rs700 on concerns of higher iron
ore costs (post the mining ban in the Karnataka state imposed by the SC). Our
current volume estimates for FY12/13 are 6.9/10.2 mt. We factor in iron ore
costs of Rs3,723/Rs4,280 /t in FY12/13 (Rs2,858/t in FY11) as JSW is likely to
buy some ore from Chattisgarh (incurring transport cost). Our current EBITDA/t
estimates for FY12/13 are US$119/151.
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