 Indian steel consumption posted meagre 3.3% growth in FY13 HSBC

 Indian steel consumption posted
meagre 3.3% growth in FY13
 Production, with a 2% y-o-y growth,
kept pace with demand; part of this
was forced
 With muted demand growth and supply
overhang, FY14 looks tough too

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The Indian steel market over the last 18 months has gone from
bad to worse. Consumption grew just 3.3% in FY13 (as per the
Joint Plant Committee’s interim release; vs HSBCe of 4.4%)
underperforming GDP growth of 5%, due to stress in the end
user markets; in part due to tight monetary policy.
Production kept pace with demand, growing just 2% y-o-y.
However, this should not be construed as production discipline
among steelmakers as a large part of the cuts were forced,
mainly due to the iron ore supply crunch in India that resulted in
steelmakers operating sub-optimally. Besides, the major
expansions were delayed and therefore the excess supply risk
continues to remain an overhang.
With Tata Steel’s and a portion of SAIL’s capacity set to
ramp up during FY14, the sector will require a strong pickup
in domestic demand or a lucrative export market. We are not
optimistic on either possibility. HSBC economists expect
FY14 India GDP growth of 6.0% and we expect similar steel
demand growth.
What do the end users say?
Indian steel demand is heavily skewed towards construction
(64% contribution) followed by capital goods (14%) and
automobiles (12%). We conduct a rough bottom-up analysis
of FY14 demand based on: a) the historical breakup of
demand, b) HSBC analyst estimates of operating costs
(Revenue less EBITDA) in the auto and capital goods
sectors, which we think are proxies for steel consumption in
those sectors, and c) cement demand growth as a proxy for
construction. Assuming the remaining 10% of demand under
“others” is unchanged, we derive FY14 steel demand growth
of c5% ; slightly below our base-case estimate of c6% , well
below our production growth assumptions of c7%, and
which could tilt trade towards net-exports from our
base-case assumption of a balanced market in FY14. With
production outpacing demand growth strongly and

the looming threat of imports from China, we think domestic steel prices will continue to remain under
pressure. Overall, FY14 is likely to be another difficult year for Indian steelmakers.


Results
Evraz (EVR LN, OW (V)) reported FY12 financial results in line with consensus except net income.
Evraz reported FY12 revenue of USD14.7bn vs consensus (Reuters’ poll) forecast of USD14.4bn and
HSBC estimate of USD14.3bn; EBITDA of USD2.01bn beating the consensus forecast of USD1.99bn by
1% but below HSBC estimate of USD2.1bn with implied EBITDA margin of 14%. The company
reported net loss of USD335m well below consensus forecast of a profit of USD43m and HSBC forecast
of a profit of USD26m. The shortfall in profit is attributed to impairment charges of USD413m (out of
which USD356m is attributed to Evrazruda and the iron ore mines). Excluding impairment charges, net
income would have been USD78m, actually above our and consensus forecasts. 2013 steel volumes are
expected to be broadly in line with 2012 with an uptick in demand of steel construction products as the
new construction season approaches. The company expects to reduce 2013 capex by 10% y-o-y to
USD1.1bn. Evraz has put its Vitkovice mill in Czech Republic (where crude steel production has been
already idled) up for sale.
Macro news
Asia
China March credit growth beats expectations - March credit growth accelerated more than expected,
with new loans topping RMB1trn from the average of RMB845bn in January and February and TSF
hitting a record high of RMB2.5trn on the back of surging trust loans and bond issuance. Apart from the
quarter-end effect, this reflects rising credit demand and continued accommodative policy stance.
Although monthly M2 growth beat 13% annual target, HSBC economists don't expect any meaningful
policy tightening in the near-term considering easing inflation and modest recovery. PBoC will have to
strike a delicate balance between sustaining recovery and containing potential inflationary risk though
open market operations.
China: March inflation drops below consensus - China's headline CPI eased by more than expected to
2.1% m-o-m in March, compared with 2.5% consensus and the average of 2.6% y-o-y in January and
February. This is mainly due to the normalization of food inflation, led by prices of vegetable and pork,
after the Chinese New Year. Meanwhile PPI's deeper contraction underlines excess industrial capacity.
As such, inflation pressure should remain contained in the coming months, leaving room for Beijing to
keep policy relatively accommodative in order to sustain growth recovery

EMEA
German industrial production (February): disappointing industrial output so far this year - In
February, German industrial production rose by 0.5 % m-o-m vs. the consensus of a 0.3% gain,
unfortunately, the January output was revised downwards to -0.6% m-o-m. Production in the first two
months of the year fell slightly compared to the last two months of 2012, indicating that the stabilisation
of the industrial sector is still struggling. The pick-up of industrial orders in February, however, points to
a rebound of activity in the next months.
German industrial orders (February) intakes rebound sharply - German industrial orders surprised
on the upside in February, making up more than the loss of the previous month. The rebound was driven
by both foreign and domestic orders; the demand for investment goods rose significantly. The Ministry of
Finance reported that big tickets were slightly below average. HSBC economists expect the stabilisation
of the industrial sector to continue over the next months.
Americas
US FOMC minutes point to phase-out of QE in H2 2013 – Minutes of the March FOMC meeting show
that Fed policymakers coalesced around the idea of phasing out the current QE program sometime in the
second half of 2013. This is earlier than generally expected by financial market participants. The FOMC
did not set a firm timetable for ending QE. A "few" of the voting members thought it would be
appropriate to reduce QE by mid-year. A larger group thought it would be appropriate to taper off later in
the year. Two members thought QE should run "at least" through the year-end. As of early March, the
prevailing market consensus was that QE would not end before Q1 2014.
US :slowest payroll gain in nine months - March nonfarm payrolls rose by 88,000 vs. consensus
+190,000, the smallest increase in nine months. The unemployment rate fell to 7.6% from 7.7%, but the
fall was attributable to yet another discouraging drop in labor force participation. Other indications of
labor demand were more favorable. The average workweek rose to 34.6 hours from 34.5 hours, the share
of employed persons working part time for economic reasons fell to its lowest in over four years.
Industry specific news
Asia
China domestic steel price and production – China domestic steel prices declined by USD7/t to
USD605-615/t and export prices by USD5-7/t to USD560-570/t and were down by USD75 from the
recent peak seen in mid-February. The weakness could be mainly attributed to a substantial inventory
build-up leading to busy construction period while demand pick-up has remained below expectations. The
crude steel production rate has also remained high during the last 11 days of March at 2.07mt/day, up
0.4% from the previous ten days. The high production rate would make the destocking process remain
slow. We note that finished steel inventories fell wow to 21.623mt (-1.4% wow, +22% yoy) but only 4%
off the record 22.5mt hit on 15 March. We have seen this pattern being played out every year with higher
finished steel inventories every other year.
China’s net steel exports increase in March –According to the data from China customs, finished steel
exports increased to 5.28mt (+12.5% mom, +5% yoy) while it exported 14.43mt during Q1 (+19% yoy).
Finished steel imports for March at 1.23mt (-3.15% yoy) and Q1 at 3.23mt (-5.3% yoy) declined, pushing

net steel exports up. We think the trend could be sustained only when Chinese export prices decline going
forward since the premium over Europe and North American prices remain uncompetitive.
EMEA
North Europe domestic steel prices decline amid weak sentiment - North European domestic HRC prices
continued its slow decline and fell further by EUR3/t and moved to the lower range of EUR480-490t (-0.6%
w-o-w, -10% y-o-y) range while sentiment remained neutral. The premium versus China export prices
increased to USD73/t but remained low for any import threat to materialise. We note that steel prices have risen
on USD terms due to the strengthening of EUR, which would make steelmakers’ raw material costs low. Lack
of domestic demand is visible from almost non-existent restocking cycle. We think weak raw material prices
also do not provide confidence for any price increases in the near term.
German crude steel output contracts in March – According to the data from WV Stahl, German crude
steel production declined by 2.2% mom to 3.815mt while crude production for Q1 at 10.814mt remained
flat yoy. The detailed release for February confirms that flat steel production remained stable yoy but long
steel products declined by 5% yoy. This clearly indicates that the restocking cycle remains weak.
EU apparent steel consumption to decline in 2013: Eurometal – According to the European steel
distributors association, Eurometal, steel demand environment would continue to remain very weak for
the year, leading to apparent consumption falling to 138mt (-3% yoy) in 2013. Jurgen Nusser, managing
director of Eurometal, at an international conference, said that it did not expect recovery before early
2014 but it would be unlikely to bring consumption to 2012 levels. Structural overcapacity remains a big
concern and Eurometal estimated it to be over 40mt.
Taranto steelworks to re-open – Italy’s constitutional court allowed the re-opening of the Taranto steelworks
by validating the environmental decree brought by the previous Italian government. This would also allow the
1.7mt of finished steel inventories to be sold and realise the sales proceeds quickly, which would ease cash
pressure for the plant. The short term effect of this decision would be increased supply impacting prices in the
near term. The plant would also continue to operate at reduced capacity utilisation of 65% (annual capacity
11mt) while it complies with the conditions of environmental upgrades.
European flat steel players under investigation for cartelisation - Handelsblatt reported that the
automotive steel cartel that is currently investigated by the German anti trust authorities existed since
1998 and manipulated mainly long term contracts. The longer the malpractice lasted, the higher the
potential fine and bearing in mind that each of these companies has been involved in other steel cartels,
they could be classified as repeat offenders, which would further increase the charges. However, at this
point in time, it is not possible to quantify the risk (other than saying that a high-three digit numbers
EURm fine is easily possible looking at the size of the market) as even the companies themselves do not
know what range of products was affected.
European plate makers see room for prices hikes – Salzgitter’s (SZG GR, UW(V)) CEO Heinz Joerg
Fuhrmann, in an industry fair, said that the company is considering modest prices increases in a month while
demand environment continue to remain weak for commodity grade plate producers. As per the reports from
Platts SBB, Dillinger’s director for marketing and sales mentioned at another industry conference, that most of

the plate markets are seeing improvement except commodity grades. We note that Dillinger is Europe’s largest
specialty plate producer based in Germany. He also expected price increases in near term.
Mechel (MTL US, N(V)) in talks with Baosteel, among other investors, to sell mining stake. Mechel
could sell 25% stake in its Mining unit to Baosteel for USD1.25bn, Vedomosti reported on 10 April 2013.
According to Vedomosti, a Russian government official delegation led by the Deputy Prime Minister,
Igor Shuvalov, is coming to China on Monday next week. However, Mechel’s controlling shareholder,
Mr Zuzyn is reportedly not part of this delegation and the sources of Vedomosti are not aware of any
scheduled meetings with Baosteel next week. At the same time, the Russia’s Antitrust Service (FAS) is
reportedly awaiting a request for permission to approve the sale of a stake in Mechel Mining and a
number of other Mechel assets. The source at FAS has not clarified from which party it is expecting to
receive a request. Mechel’s CFO commented that the company is in talks with different investors but has
not reached any agreement yet. The CFO further said that partial stake sale of mining unit is to speed up
the Elga coal project and the company, as an alternative to sale of mining stake, is also considering
project financing currently under negotiations with state bank VEB.
Mechel (MTL US, N(V)) signs USD1.3bn loan agreement with VTB. Mechel has signed a USD1.3bn
loan agreement with VTB Bank and plans to use the funds for refinancing purposes. The loan has a 15
month grace period followed by quarterly amortization with final repayment in five years after the
agreement is signed. The interest on loan would depend on Mechel’s net debt to EBITDA ratio with part
of interest rate being up for capitalization. Mechel has USD2.2bn due in 2013 and USD300mn remain
from December 2012. As per last reported data, undrawn lines plus cash accounted for USD1.2bn and this
new loan of USD1.3bn from VTB would be just enough to cover the next 12 months repayments.
Severstal (SVST LI, N(V)) to remain conservative on debt, control capex. Severstal’s CFO
commented that the company will not borrow again until it improves its net debt to EBITDA ratio to 1.5x,
Bloomberg reported on 10 April 2013. He further added that given the tough environment the company
has no plans of increasing the capex.
Severstal (SVST LI, N(V)) launched new finishing press to supply pipes for South Stream. Severstal’s
Izhora pipe mill has commissioned a new finishing press, which will focus on manufacturing of small diameter
heavyweight pipes to supply Gazprom for the off-shore part of its South Stream project. This launch is a part of
a wider project to develop Severstal's large diameter pipes (LDPs) offering wherein the company will invest
RUB1.3bn (cUSD42m) and will include the commissioning of a second expander this spring.
Americas
North American steel prices turned weak amid tempering sentiment - North American domestic steel
prices declined by USD7/t to USD670-680/t (-1% w-o-w, -11% y-o-y) while sentiment deteriorated but
remained neutral. The premium over China export prices also remained unchanged at USD114/t, which
should make any price increases difficult to sustain unless China export prices improve. Steel supply in
the domestic market remains good indicated by increasing utilisation and fall in delivery lead times.
Restocking has remained very muted during Q1 and there are no signs of pick-up either. As per the latest
ISM survey conducted among steel buyers clearly shows that they are cutting back on inventories which
take out any bullish expectations in the near term.

US crude steel production increased 2.1% w-o-w – According to American Iron and Steel Institute, for
the week ended 6 April, US crude steel production was 1.86 m.s.t, up 2.1% as compared to previous week
and down c7.7% as compared to corresponding week in 2012. The utilization rate increased to 77.6% as
compared to 75.9%, the week prior.
Gerdau North America (GGBR4.SA, OW) increased rebar prices by USD10/s.t. – Gerdau NA
announced an increase of USD10//s.t in rebar prices. The price hike is effective for new orders post
15 April. We note that scrap surcharges for long products have dropped by USD22/t.
Brazil auto production increased 39% m-o-m in March – According to ANFAVEA, Brazil’s automotive
association, auto production was 319,100 units (up 39%% m-o-m, up 3% y-o-y) in March. We note that
February data were impacted due to seasonality effect (Brazil Carnival). Domestic sales were strong and came
in at 283,912 units, up 21% m-o-m but down 6% y-o-y. Imports were 55,081 units, up 11% m-o-m but down
22% y-o-y. ANFAVEA maintained its growth forecast of 3.5% -4.5% in 2013 as the government has extended
the reduction in IPI (tax on industrialized products) through December 2013.
Mexico auto production decreased c3.1% m-o-m in March – According to AMIA, Mexico’s automotive
association, auto production was 238,519 units (down 3.1% m-o-m, down 11.2% y-o-y) in March. Exports
were 204,475 units, up 17% m-o-m. In terms of domestic sales, 82,767 automobiles were sold in March.
Domestic sales remains strong, however, its overall level is still placed below pre-crisis numbers.
North American rig count declined – According to data from Baker Hughes, the North American rig
count continued its declining trend for the week by further 50 w-o-w and down by 222 y-o-y mainly due
to seasonal decline in Canadian rig counts. US rigs employed in oil production increased by 3 w-o-w,
while the number of rigs used for gas production declined by 14 w-o-w. US natural gas prices continue to
rally (+12% m-o-m, 114% yoy), which should help drilling activities in the coming months.
Raw materials
Steel scrap and iron ore prices rangebound but coking coal prices declined further – Iron ore prices
(62% China Imp CFR) firmed up but remained rangebound for the week at USD130-140/t (+3% w-o-w,
-6% y-o-y). The strength in spot iron ore prices could be mainly due to inventories at Chinese ports
remaining low. While Chinese iron ore imports surged in March to 64.5mt (+14.4% mom, +2.7% yoy),
the high crude steel output rate kept inventories on the lower side, which should help keep prices rangebound in the near term. Prime coking coal (CIF China) prices continued to slide, declining by another
USD2/t to USD150/t (-2% w-o-w, -26% y-o-y), which is the lowest level since early November 2012 and
USD20/t below quarterly contract prices mainly due to improved supply and weak demand from India
and China. We suspect persistently weak spot prices would force miners to adjust delivery prices for the
quarter. US domestic shredded scrap prices remained stable at USD387/t (+0.5% w-o-w, -9% y-o-y).
Brazil iron ore exports bounced back in March –Brazil March iron ore exports increased 9% m-o-m
(down 18% y-o-y) to 22.5mt. The average (FOB) price increased 8% m-o-m (+10% y-o-y) to USD110.8/t
on the back of stronger spot prices. Brazil exported c67.8mt of iron ore in 1Q13, down 1% from 1Q12.
1Q volumes are always impacted by seasonality.