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HSBC Steel Weekly
India Steel – benefiting from the INR depreciation
Over the last year, Indian HRC realizations increase c6% vs
c12% drop in China HRC prices as INR depreciates c25%
Whereas INR depreciation increases raw material costs,
margins tends to improve
8% steel consumption growth for Apr-12, a welcome respite;
but possibly boosted by one-off effects
Steel prices in India increase amid falling international prices
Following INR depreciation of c25% over the last year, Indian steel prices have actually
increased c8% y-y in May-12 (realizations for steel mills have gone up c6% when
adjusted for higher excise duty). This leaves Indian mills in a sweet spot compared to their
Chinese counterparts, where HRC prices have fallen c12% over the same period (see
Exhibit 1 overleaf)
Costs rising for non-integrated players, but margins tend to increase nonetheless
For the non-integrated steel players (using import coking coal, and domestic iron ore) in
India, raw material costs, denominated in INR, would increase as they have to pay up for
import coking coal that, but also for iron ore, which is priced on export-parity. Since exports
of iron ore yield higher prices when INR depreciates, the opportunity cost of selling ore in
India is increasing prices in India too. However, whereas steel prices are revised on monthly
basis, raw material contracts get revised on quarterly basis – giving steel companies in India
and EBITDA margin expansion in times of a rapidly depreciating currency.
Eventually elevated INR will eventually hurt via foreign currency loans
What remains under the surface is the impact on debt. Most companies in our coverage
(see Exhibit 2 overleaf ) do carry meaningful foreign currency loans on their balance
sheets. Under current Indian accounting standards, the INR depreciation results in higher
marked-to-market FX losses that are not flowing through the P&L until the loan is
actually paid-off. While profits in the more distant future could be hit if the INR does not
recover, the mills can enjoy higher earnings for the time being.
April consumption data is a welcome respite, but questions persist
Steel consumption increased 8% y-y in Apr-12, and hence above our 6% average for FY12e.
Exports declined c5% and imports rose 93% in Apr while production grew at 5%. We
suspect that consumption could have been artificially boosted in Apr, as the increase in
excise duties was widely expected by the market. May consumption data, therefore, should
give a clearer picture about how real demand growth keeps up with the various headwinds.
Results
Severstal (SVST LI, N(V)) reports Q1FY12 results, stronger net income mainly on one-offs.
Severstal reported revenue of USD3,679m (-1% q-o-q) in line with (Reuters) consensus forecast of
USD3,678m and marginally below our forecast of USD3,727m; reported underlying EBITDA of
USD562m (-27% q-o-q) significantly below consensus forecast of USD630m and our forecast of
USD721m, primarily due to a one-off inventory charge of USD57m and lower realized prices at Russian
steel. With EBITDA margin of 15.3% Severstal retained the highest margin steelmaker position.
Excluding the one-off effect the EBITDA of USD618m implied an EBITDA margin of 17%. Severstal
reported net income of USD427m significantly beating consensus forecast of USD318m and our forecast
of USD325m. Net income decreased less than EBITDA due to the support of strong Rouble and the effect
of separation of Nordgold. The management expects higher demand in Russia in Q2FY12 due to seasonal
construction growth but expects export markets to remain volatile due to weak European demand.
However, some demand could pick up due to buying ahead of Ramadan in the Middle East. Positive trend
in the US led by autos is expected by the company to continue in Q2FY12 as well. Severstal board has
recommended a dividend payment of USD0.13 per share for Q1FY12 (to be approved at the company's
AGM on 28 June 2012).
Tata Steel (TATA IN, N) reported strong Q4 FY12 numbers, in line with consensus expectations:
Tata Steel reported standalone EBITDA of INR30bn (-2.5% y-o-y/ +13.1% q-o-q) and consolidated
EBITDA of INR32bn (-28.8% y-o-y/+66.1% q-o-q), in line with consensus and our estimates.
Consolidated NPAT surprised negatively at INR2bn (down c89.1% y-o-y) and c80% below our estimate
due to: a) adoption of Accounting Standard 11, and b) ETR of c82% due to losses at some European
entities not being tax deductible. The company reported FY12 net debt at USD8.9bn and a pension
surplus of GBP211m (triennial valuations underway, hence clearer picture of pension status will emerge
over next two months). Outlook: We believe Tata Steel will have to deal with multiple issues: a) falling
margins at the incumbent India business (as expected, lower iron ore prices result in lower mining
margins); b) low margins at the expanded India business (as the facility is not as integrated as existing
one); and c) continued pressure at its European business. Hence, we downgraded the stock to Neutral
(from Overweight) and cut TP to INR450 (from INR500 earlier).
Macro News
Asia
HSBC China Manufacturing PMI still weakening, more easing on the way: The flash reading of
HSBC China manufacturing PMI dropped to 48.7 in May (compared with 49.3 final reading in April), the
lowest reading this year. Manufacturing activities softened again in May, weighed down by exports
orders growth. Beijing policy makers are stepping up easing efforts to stabilize growth, as evidenced by
the recent slew of measures to boost liquidity, public housing and infrastructure investment and
consumption. HSBC economists expect Beijing to deliver more aggressive policy easing, as inflation
continues to slow. As long as the impact of these easing measures filter through, China should secure a
soft landing in the coming quarters.
Indian Rupee falls to record lows: The Indian rupee fell to record lows of c56 vs the US dollar this
week, depreciating by c11% over the Jan-Mar quarter average of 50.16. While this fall partly cushions
steelmakers from falling regional steel prices, it also makes coking coal imports c4% more expensive
over Jan-Mar levels, despite a 6.5% fall in USD denominated coking coal spot prices. Domestic flat
product prices showing sustained weakness due to demand issues (long product prices enjoy stronger cost
support due to iron ore/ thermal coal availability issues), which poses particular risks for the nonintegrated
flat steel producers such as JSW Steel (which also faces iron ore supply problems) if regional
prices continue the downtrend.
EMEA
Eurozone PMI - it gets worse: The flash estimate of the Eurozone PMI contracted to the worst level
since mid-2009, to 45.9 (vs. 46.7 in April). The one piece of good news was the ongoing resilience of the
service sector PMI in Germany (52.2) but the overall composite PMI fell below 50 to 49.6, thanks to the
sharp contraction in German manufacturing. On the other hand, France registered a faster pace of
contraction (composite PMI at 44.7), along with the rest of the Eurozone. Overall, Eurozone PMI
indicators remain consistent with a contraction in Q2.
Russian consumer demand growth eases despite tight labour market. The April macroeconomic
release provided mixed data on domestic demand, at first glance. While the growth of investment goods
demand has accelerated, the growth of demand for consumption goods eased. Yet, empirical evidence
suggests that the former should be primarily attributed to state investment activity, while the private
sector does not boost its investment activity much. Overall, the April data points to the likely moderation
of economic activity expansion in the coming months. HSBC economists continue to expect GDP growth
to stabilize at annualized 2.5% y-o-y in 2H 2012.
Americas
United States April existing home sales better than expectation – April existing home sales rose 3.4%
m-o-m to an annual rate of 4.62m, matching consensus expectations. The pace of sales has now exceeded
4.60m in three out of the first four months of 2012. In comparison, sales did not surpass 4.60m in any of
the twelve months of 2011. HSBC economist expect that existing home sales will average around 4.60m
this year, about a 7.5% increase from the 4.28m sales rate recorded in 2011and the months supply of
existing homes for sale to average around 6 months this year, down from 8 to 10 months in each of the
past five years. Home sales have improved since the end of 2011, and relative oversupply of homes for
sale has been shrinking. However, HSBC economists do not see these housing metrics improving much
further in the remainder of this year.
Central Bank of Brazil sells USD to halt BRL skid: On the back of some very ugly price action on last
Friday the Central Bank of Brazil (BCB) has stepped into the market with USD sales via swaps contracts.
They offered 13,000 swaps (around USD650m) and all were sold. This is a smaller amount than the
approximate USD6.0bn they sold last September/October. Whether or not this can help to stabilize or
reverse the BRL's slide remains to be seen, but it demonstrates that the authorities are uncomfortable with
the pace of the move seen today.
Long USD positions hit new cycle high: Total long USD positions rose to USD27.8bn in the week
ended May 15 from USD19bn the previous week, using the cumulative notional USD total of the
currency futures contracts that trade on the IMM. The sizeable one-week increase put long USD positions
at their largest of this cycle, dating back to September 2011 when speculators flipped from short to long
dollars. The rise is consistent with the USD’s broad gains of late, as increased Greece/Eurozone stresses
have given the currency a substantial lift.
Industry Specific News
April crude steel production increased slightly y-o-y. As per the World Steel Association, global crude
steel production for April 2012 rose 1.2% y-o-y to 128.4mt, of which China contributed 60.6mt (c47% of
the total). Jan-Apr cumulative production for 2012 at 504.0mt is marginally above 500.2mt production
during corresponding 2011 period. The capacity utilisation ratio at 81.1% was mainly unchanged m-o-m
(-1.7 percentage points y-o-y).
Asia
Chinese steel market continued to trend down last week. The HRC prices fell by 1.2% WoW to
Rmb4,418/t (VAT-inclusive) and CRC prices lost 0.9% WoW to Rmb5,120/t. Rebar prices was down by
1.7% WoW to Rmb4,223/t and wire rods prices down by 1.4% WoW to Rmb4,258/t.
Inventory level continued to stay at high levels. Although inventory of China’s five major steel
products has declined for 12 straight weeks to 16.7m tonnes by the end of last week from a high 19.0m
tonnes in Feb, it is still 9% higher than the same time last year.
Exports of finished steel products in Apr declined by 7%MoM from a 21-month high in Mar and
down by 2% YoY to 4.67m tonnes. The number may decline further in May due to narrowed price gap
between domestic and overseas market as well as poor overseas demand. This in turn will further worsen
the oversupply issue in domestic market.
Baosteel has announced on May 9 that it will keep prices of its main steel products unchanged for
June deliveries. WISCO has also recently announced to cut its HRC prices by Rmb80/t and certain CRC
prices by Rmb100/t for June deliveries.
JSW Steel (JSTL IN, N(V)) reports strong April production numbers: JSW Steel reported a 35% y-oy
growth in crude steel production during April 2012. Capacity utilization levels were at 80% during the
month. However, as we had highlighted in our Q4 FY12 results note, raw material visibility is only until
July, post which a delay in start of Category A and B mines in Karnataka could bring down utilization
levels sharply.
RINL files IPO document: Rashtriya Ispat Nigam Ltd (RINL), India's second largest public sector steel
company (and a long products producer) with a capacity of 6.3mtpa currently (to which it plans to add an
incremental 1mtpa by means of modernization and debottlenecking by end FY14), recently filed IPO
papers with the Securities Exchange Board of India. Through the IPO, the Government of India plans to
divest 10% of its stake in RINL and raise INR25bn (USD450m).
EMEA
Weak sentiment for prices and volumes prevail – European steel prices remained hardly changed at
UR528/t, which resulted in a USD10/t drop w-o-w due to the weakening USD/EUR exchange rate. We
continue to think that downside should be limited as prices are only covering marginal costs, the price
premium to China export prices has narrowed to just USD37/t and prices in Northern Europe are at a
discount to Southern Europe again. With weak macro news all around it is no surprise that the price
sentiment remained bearish, whereas the demand sentiment continued to weaken thereby turning
borderline bearish.
ThyssenKrupp [TKAG.DE, Neutral(V)] rating outlook revised to negative: Fitch has revised down
the rating outlook for ThyssenKrupp’s long-term Issuer Default Rating (IDR) from ‘stable’ to ‘negative’
following Q2-12 interim results owing to spiralling debt, significant corrosion of other credit metrics and
uncertainty regarding the potential sale of the Steel Americas operations. The rating agency has assigned
‘BBB-‘ for long-term IDR and senior unsecured loans, while ‘F3’ for Short-term IDR. Fitch considers the
company’s diversified business and superior liquidity profile to be the key supporting factors for its credit
profile. We would expect only a minor direct impact from a rating downgrade by Fitch.
EU commission opens in-depth investigation for acquisition of Inoxum: Under EU Merger
Regulation, EU commission has initiated thorough investigation of planned acquisition of Inoxum, the
stainless steel division of ThyssenKrupp [TKAG.DE, Neutral(V)], by Outokumpu. During the
preliminary investigation, serious competition concerns were indicated in stainless steel flat products. The
commission would make a final decision on the transaction in 90 working days (i.e. by September 26). A
phase 2 investigation is in line with company guidance and our expectations and given the size of the deal
we think this is business as usual and we expect that the acquisition will get cleared in the end.
ArcelorMittal [MT.N, N(V)] suspended USD1.5bn Brazil expansion. Due to a lack of domestic
demand and a weaker outlook for global demand, ArcelorMittal's Brazil unit has deferred USD1.5bn
expansion plan to build a wire rod plant (USD1.2bn) and a specialty steel production line.
TMK (TMKS LI, OW(V)) board recommends FY11 dividend. TMK board has recommended a
dividend payment of USD0.09 per share for FY11, implying a dividend yield of 3%. The dividend
payment is to be approved at the company’s AGM on 26 June 2012 and payments will be made on
24 August 2012.
Severstal’s (SVST LI, N(V)) Lucchini in advance talks for a potential sale. Lucchini, an Italian
steelmaker owned by Severstal and Severstal’s owner Alexei Mordashov, is in advanced talks with
potential buyers for a complete sale by the end of 2012, as reported by Reuters on 17 May 2012. Lucchini
specializes in making long products used in infrastructure projects. Lucchini’s CFO, Maurizio Ria, said
that the contacts with potential buyers are at an advanced stage and the goal is to sign a preliminary by
summer and close the deal by year end.
MMK’s (MMK LI, UW(V)) Flinders acquisition, hearing re-scheduled for 2 July 2012. MMK’s
takeover of Flinders mines continues to face problems as after a re-scheduled hearing on 24 April 2012,
the Russian local court has further scheduled it for 2 July 2012, Bloomberg reported on 24 May 2012.
The new date for hearing falls after 30 June 2012, the date of expiry of the MMK offer to purchase
Flinders. The hearing is related to the lawsuit by a minority shareholder raising concerns that the purchase
of Flinders by MMK would create financial and operational risks. The court has closed the hearings for
public as financials and company information would be discussed. As mentioned earlier, MMK’s appeal
against the injunction will be heard on 30 May 2012 by another court.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HSBC Steel Weekly
India Steel – benefiting from the INR depreciation
Over the last year, Indian HRC realizations increase c6% vs
c12% drop in China HRC prices as INR depreciates c25%
Whereas INR depreciation increases raw material costs,
margins tends to improve
8% steel consumption growth for Apr-12, a welcome respite;
but possibly boosted by one-off effects
Steel prices in India increase amid falling international prices
Following INR depreciation of c25% over the last year, Indian steel prices have actually
increased c8% y-y in May-12 (realizations for steel mills have gone up c6% when
adjusted for higher excise duty). This leaves Indian mills in a sweet spot compared to their
Chinese counterparts, where HRC prices have fallen c12% over the same period (see
Exhibit 1 overleaf)
Costs rising for non-integrated players, but margins tend to increase nonetheless
For the non-integrated steel players (using import coking coal, and domestic iron ore) in
India, raw material costs, denominated in INR, would increase as they have to pay up for
import coking coal that, but also for iron ore, which is priced on export-parity. Since exports
of iron ore yield higher prices when INR depreciates, the opportunity cost of selling ore in
India is increasing prices in India too. However, whereas steel prices are revised on monthly
basis, raw material contracts get revised on quarterly basis – giving steel companies in India
and EBITDA margin expansion in times of a rapidly depreciating currency.
Eventually elevated INR will eventually hurt via foreign currency loans
What remains under the surface is the impact on debt. Most companies in our coverage
(see Exhibit 2 overleaf ) do carry meaningful foreign currency loans on their balance
sheets. Under current Indian accounting standards, the INR depreciation results in higher
marked-to-market FX losses that are not flowing through the P&L until the loan is
actually paid-off. While profits in the more distant future could be hit if the INR does not
recover, the mills can enjoy higher earnings for the time being.
April consumption data is a welcome respite, but questions persist
Steel consumption increased 8% y-y in Apr-12, and hence above our 6% average for FY12e.
Exports declined c5% and imports rose 93% in Apr while production grew at 5%. We
suspect that consumption could have been artificially boosted in Apr, as the increase in
excise duties was widely expected by the market. May consumption data, therefore, should
give a clearer picture about how real demand growth keeps up with the various headwinds.
Results
Severstal (SVST LI, N(V)) reports Q1FY12 results, stronger net income mainly on one-offs.
Severstal reported revenue of USD3,679m (-1% q-o-q) in line with (Reuters) consensus forecast of
USD3,678m and marginally below our forecast of USD3,727m; reported underlying EBITDA of
USD562m (-27% q-o-q) significantly below consensus forecast of USD630m and our forecast of
USD721m, primarily due to a one-off inventory charge of USD57m and lower realized prices at Russian
steel. With EBITDA margin of 15.3% Severstal retained the highest margin steelmaker position.
Excluding the one-off effect the EBITDA of USD618m implied an EBITDA margin of 17%. Severstal
reported net income of USD427m significantly beating consensus forecast of USD318m and our forecast
of USD325m. Net income decreased less than EBITDA due to the support of strong Rouble and the effect
of separation of Nordgold. The management expects higher demand in Russia in Q2FY12 due to seasonal
construction growth but expects export markets to remain volatile due to weak European demand.
However, some demand could pick up due to buying ahead of Ramadan in the Middle East. Positive trend
in the US led by autos is expected by the company to continue in Q2FY12 as well. Severstal board has
recommended a dividend payment of USD0.13 per share for Q1FY12 (to be approved at the company's
AGM on 28 June 2012).
Tata Steel (TATA IN, N) reported strong Q4 FY12 numbers, in line with consensus expectations:
Tata Steel reported standalone EBITDA of INR30bn (-2.5% y-o-y/ +13.1% q-o-q) and consolidated
EBITDA of INR32bn (-28.8% y-o-y/+66.1% q-o-q), in line with consensus and our estimates.
Consolidated NPAT surprised negatively at INR2bn (down c89.1% y-o-y) and c80% below our estimate
due to: a) adoption of Accounting Standard 11, and b) ETR of c82% due to losses at some European
entities not being tax deductible. The company reported FY12 net debt at USD8.9bn and a pension
surplus of GBP211m (triennial valuations underway, hence clearer picture of pension status will emerge
over next two months). Outlook: We believe Tata Steel will have to deal with multiple issues: a) falling
margins at the incumbent India business (as expected, lower iron ore prices result in lower mining
margins); b) low margins at the expanded India business (as the facility is not as integrated as existing
one); and c) continued pressure at its European business. Hence, we downgraded the stock to Neutral
(from Overweight) and cut TP to INR450 (from INR500 earlier).
Macro News
Asia
HSBC China Manufacturing PMI still weakening, more easing on the way: The flash reading of
HSBC China manufacturing PMI dropped to 48.7 in May (compared with 49.3 final reading in April), the
lowest reading this year. Manufacturing activities softened again in May, weighed down by exports
orders growth. Beijing policy makers are stepping up easing efforts to stabilize growth, as evidenced by
the recent slew of measures to boost liquidity, public housing and infrastructure investment and
consumption. HSBC economists expect Beijing to deliver more aggressive policy easing, as inflation
continues to slow. As long as the impact of these easing measures filter through, China should secure a
soft landing in the coming quarters.
Indian Rupee falls to record lows: The Indian rupee fell to record lows of c56 vs the US dollar this
week, depreciating by c11% over the Jan-Mar quarter average of 50.16. While this fall partly cushions
steelmakers from falling regional steel prices, it also makes coking coal imports c4% more expensive
over Jan-Mar levels, despite a 6.5% fall in USD denominated coking coal spot prices. Domestic flat
product prices showing sustained weakness due to demand issues (long product prices enjoy stronger cost
support due to iron ore/ thermal coal availability issues), which poses particular risks for the nonintegrated
flat steel producers such as JSW Steel (which also faces iron ore supply problems) if regional
prices continue the downtrend.
EMEA
Eurozone PMI - it gets worse: The flash estimate of the Eurozone PMI contracted to the worst level
since mid-2009, to 45.9 (vs. 46.7 in April). The one piece of good news was the ongoing resilience of the
service sector PMI in Germany (52.2) but the overall composite PMI fell below 50 to 49.6, thanks to the
sharp contraction in German manufacturing. On the other hand, France registered a faster pace of
contraction (composite PMI at 44.7), along with the rest of the Eurozone. Overall, Eurozone PMI
indicators remain consistent with a contraction in Q2.
Russian consumer demand growth eases despite tight labour market. The April macroeconomic
release provided mixed data on domestic demand, at first glance. While the growth of investment goods
demand has accelerated, the growth of demand for consumption goods eased. Yet, empirical evidence
suggests that the former should be primarily attributed to state investment activity, while the private
sector does not boost its investment activity much. Overall, the April data points to the likely moderation
of economic activity expansion in the coming months. HSBC economists continue to expect GDP growth
to stabilize at annualized 2.5% y-o-y in 2H 2012.
Americas
United States April existing home sales better than expectation – April existing home sales rose 3.4%
m-o-m to an annual rate of 4.62m, matching consensus expectations. The pace of sales has now exceeded
4.60m in three out of the first four months of 2012. In comparison, sales did not surpass 4.60m in any of
the twelve months of 2011. HSBC economist expect that existing home sales will average around 4.60m
this year, about a 7.5% increase from the 4.28m sales rate recorded in 2011and the months supply of
existing homes for sale to average around 6 months this year, down from 8 to 10 months in each of the
past five years. Home sales have improved since the end of 2011, and relative oversupply of homes for
sale has been shrinking. However, HSBC economists do not see these housing metrics improving much
further in the remainder of this year.
Central Bank of Brazil sells USD to halt BRL skid: On the back of some very ugly price action on last
Friday the Central Bank of Brazil (BCB) has stepped into the market with USD sales via swaps contracts.
They offered 13,000 swaps (around USD650m) and all were sold. This is a smaller amount than the
approximate USD6.0bn they sold last September/October. Whether or not this can help to stabilize or
reverse the BRL's slide remains to be seen, but it demonstrates that the authorities are uncomfortable with
the pace of the move seen today.
Long USD positions hit new cycle high: Total long USD positions rose to USD27.8bn in the week
ended May 15 from USD19bn the previous week, using the cumulative notional USD total of the
currency futures contracts that trade on the IMM. The sizeable one-week increase put long USD positions
at their largest of this cycle, dating back to September 2011 when speculators flipped from short to long
dollars. The rise is consistent with the USD’s broad gains of late, as increased Greece/Eurozone stresses
have given the currency a substantial lift.
Industry Specific News
April crude steel production increased slightly y-o-y. As per the World Steel Association, global crude
steel production for April 2012 rose 1.2% y-o-y to 128.4mt, of which China contributed 60.6mt (c47% of
the total). Jan-Apr cumulative production for 2012 at 504.0mt is marginally above 500.2mt production
during corresponding 2011 period. The capacity utilisation ratio at 81.1% was mainly unchanged m-o-m
(-1.7 percentage points y-o-y).
Asia
Chinese steel market continued to trend down last week. The HRC prices fell by 1.2% WoW to
Rmb4,418/t (VAT-inclusive) and CRC prices lost 0.9% WoW to Rmb5,120/t. Rebar prices was down by
1.7% WoW to Rmb4,223/t and wire rods prices down by 1.4% WoW to Rmb4,258/t.
Inventory level continued to stay at high levels. Although inventory of China’s five major steel
products has declined for 12 straight weeks to 16.7m tonnes by the end of last week from a high 19.0m
tonnes in Feb, it is still 9% higher than the same time last year.
Exports of finished steel products in Apr declined by 7%MoM from a 21-month high in Mar and
down by 2% YoY to 4.67m tonnes. The number may decline further in May due to narrowed price gap
between domestic and overseas market as well as poor overseas demand. This in turn will further worsen
the oversupply issue in domestic market.
Baosteel has announced on May 9 that it will keep prices of its main steel products unchanged for
June deliveries. WISCO has also recently announced to cut its HRC prices by Rmb80/t and certain CRC
prices by Rmb100/t for June deliveries.
JSW Steel (JSTL IN, N(V)) reports strong April production numbers: JSW Steel reported a 35% y-oy
growth in crude steel production during April 2012. Capacity utilization levels were at 80% during the
month. However, as we had highlighted in our Q4 FY12 results note, raw material visibility is only until
July, post which a delay in start of Category A and B mines in Karnataka could bring down utilization
levels sharply.
RINL files IPO document: Rashtriya Ispat Nigam Ltd (RINL), India's second largest public sector steel
company (and a long products producer) with a capacity of 6.3mtpa currently (to which it plans to add an
incremental 1mtpa by means of modernization and debottlenecking by end FY14), recently filed IPO
papers with the Securities Exchange Board of India. Through the IPO, the Government of India plans to
divest 10% of its stake in RINL and raise INR25bn (USD450m).
EMEA
Weak sentiment for prices and volumes prevail – European steel prices remained hardly changed at
UR528/t, which resulted in a USD10/t drop w-o-w due to the weakening USD/EUR exchange rate. We
continue to think that downside should be limited as prices are only covering marginal costs, the price
premium to China export prices has narrowed to just USD37/t and prices in Northern Europe are at a
discount to Southern Europe again. With weak macro news all around it is no surprise that the price
sentiment remained bearish, whereas the demand sentiment continued to weaken thereby turning
borderline bearish.
ThyssenKrupp [TKAG.DE, Neutral(V)] rating outlook revised to negative: Fitch has revised down
the rating outlook for ThyssenKrupp’s long-term Issuer Default Rating (IDR) from ‘stable’ to ‘negative’
following Q2-12 interim results owing to spiralling debt, significant corrosion of other credit metrics and
uncertainty regarding the potential sale of the Steel Americas operations. The rating agency has assigned
‘BBB-‘ for long-term IDR and senior unsecured loans, while ‘F3’ for Short-term IDR. Fitch considers the
company’s diversified business and superior liquidity profile to be the key supporting factors for its credit
profile. We would expect only a minor direct impact from a rating downgrade by Fitch.
EU commission opens in-depth investigation for acquisition of Inoxum: Under EU Merger
Regulation, EU commission has initiated thorough investigation of planned acquisition of Inoxum, the
stainless steel division of ThyssenKrupp [TKAG.DE, Neutral(V)], by Outokumpu. During the
preliminary investigation, serious competition concerns were indicated in stainless steel flat products. The
commission would make a final decision on the transaction in 90 working days (i.e. by September 26). A
phase 2 investigation is in line with company guidance and our expectations and given the size of the deal
we think this is business as usual and we expect that the acquisition will get cleared in the end.
ArcelorMittal [MT.N, N(V)] suspended USD1.5bn Brazil expansion. Due to a lack of domestic
demand and a weaker outlook for global demand, ArcelorMittal's Brazil unit has deferred USD1.5bn
expansion plan to build a wire rod plant (USD1.2bn) and a specialty steel production line.
TMK (TMKS LI, OW(V)) board recommends FY11 dividend. TMK board has recommended a
dividend payment of USD0.09 per share for FY11, implying a dividend yield of 3%. The dividend
payment is to be approved at the company’s AGM on 26 June 2012 and payments will be made on
24 August 2012.
Severstal’s (SVST LI, N(V)) Lucchini in advance talks for a potential sale. Lucchini, an Italian
steelmaker owned by Severstal and Severstal’s owner Alexei Mordashov, is in advanced talks with
potential buyers for a complete sale by the end of 2012, as reported by Reuters on 17 May 2012. Lucchini
specializes in making long products used in infrastructure projects. Lucchini’s CFO, Maurizio Ria, said
that the contacts with potential buyers are at an advanced stage and the goal is to sign a preliminary by
summer and close the deal by year end.
MMK’s (MMK LI, UW(V)) Flinders acquisition, hearing re-scheduled for 2 July 2012. MMK’s
takeover of Flinders mines continues to face problems as after a re-scheduled hearing on 24 April 2012,
the Russian local court has further scheduled it for 2 July 2012, Bloomberg reported on 24 May 2012.
The new date for hearing falls after 30 June 2012, the date of expiry of the MMK offer to purchase
Flinders. The hearing is related to the lawsuit by a minority shareholder raising concerns that the purchase
of Flinders by MMK would create financial and operational risks. The court has closed the hearings for
public as financials and company information would be discussed. As mentioned earlier, MMK’s appeal
against the injunction will be heard on 30 May 2012 by another court.
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