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Wednesday 15 October 2008
Steel Prices Plunge to 2008 Lowest Levels on Panic Selling
Prices of key steel products yesterday plunged to their lowest levels in 2008 on panic selling, as steel mills are unsure when end-user demand will pick up. We see more downside risk to prices. Avoid the sector. PDF
Steel Prices Plunge to 2008 Lowest Levels on Panic Selling
Prices of key steel products yesterday plunged to their lowest levels in 2008 on panic selling, as steel mills are unsure when end-user demand will pick up. We see more downside risk to prices. Avoid the sector.
Event
Prices of key steel products plunged to their lowest levels in 2008 yesterday. Steel mills fought over one another to sell down inventories, erasing all the year-on-year gains. The panic selling came as the mills are unsure when the downward spiral in steel prices will end, given weakening end-user demand. The scale of product price declines in one week is captured in the two tables below.
Steel prices fall to 2008 lows, erasing the yoy gains
Sector impact
The price falls between Oct 8 and yesterday were unusually sharp for steel used in real estate construction, such as rebars and wire rods. Within a week, rebars fell by almost 16%, and wire rods, by nearly 18% - the sharpest falls since prices began easing in end-July.
Their declines came as numbers showed that real estate primary transactions in 20 key cities plunged 50-60% during the week-long National Day, traditionally a strong period for flat and house sales. Hot-rolled sheets, the basic raw material for processing into flat products, also plunged sharply, by 16%, as auto and white goods sales weakened further. Steel mills are now cutting output or carrying out mill maintenance to avoid losses. This will probably mean that steel output growth in 2008 can conceivably fall to below 5% yoy this year – the lowest since 2000.
Stock impact
We believe there is more downside risk to product prices, unless China’s real estate sector perks up. Real estate, along with industrial and commercial development, account for nearly 37% of the final steel use in China. Using the 2009 consensus PE of 6.3x for Posco - Asia’s biggest and most efficient steel mill as a yardstick - we make the following changes to the target prices of the three state-listed steel stocks:
1. Maintain HOLD on Angang Steel (347, HK$5.68), with a lower target price of HK$6.02 (-29%), based on 5x 2009 earnings and a 20% discount to Posco. 2. Maintain HOLD on Maanshan Iron (323.HK, HK$1.94) with a lower target price of HK$2.2 (-55%), or 3.5x 00 earnings, and a 30% discount to Posco’s 2009F PE. 3. DOWNGRADE Chongqing Iron (1053.HK, HK$1.13) to HOLD with a target price of HK$1.23, or 2.5x 2009 earnings, or a 60% discount to Posco.
These stocks are expected to pay a dividend yield of at least 8% for 2008. So, the scenario worsens considerably, it is hard to call a SELL on them.
Cheers
FOO Choy Peng Associate Director (China Research) UOB Kay Hian (HK) Tel (852) 2236 6798
1 comment:
Steel Prices Plunge to 2008 Lowest Levels on Panic Selling
Prices of key steel products yesterday plunged to their lowest levels in 2008 on panic selling, as steel mills are unsure when end-user demand will pick up. We see more downside risk to prices. Avoid the sector.
Event
Prices of key steel products plunged to their lowest levels in 2008 yesterday. Steel mills fought over one another to sell down inventories, erasing all the year-on-year gains. The panic selling came as the mills are unsure when the downward spiral in steel prices will end, given weakening end-user demand. The scale of product price declines in one week is captured in the two tables below.
Steel prices fall to 2008 lows, erasing the yoy gains
Sector impact
The price falls between Oct 8 and yesterday were unusually sharp for steel used in real estate construction, such as rebars and wire rods. Within a week, rebars fell by almost 16%, and wire rods, by nearly 18% - the sharpest falls since prices began easing in end-July.
Their declines came as numbers showed that real estate primary transactions in 20 key cities plunged 50-60% during the week-long National Day, traditionally a strong period for flat and house sales. Hot-rolled sheets, the basic raw material for processing into flat products, also plunged sharply, by 16%, as auto and white goods sales weakened further. Steel mills are now cutting output or carrying out mill maintenance to avoid losses. This will probably mean that steel output growth in 2008 can conceivably fall to below 5% yoy this year – the lowest since 2000.
Stock impact
We believe there is more downside risk to product prices, unless China’s real estate sector perks up. Real estate, along with industrial and commercial development, account for nearly 37% of the final steel use in China. Using the 2009 consensus PE of 6.3x for Posco - Asia’s biggest and most efficient steel mill as a yardstick - we make the following changes to the target prices of the three state-listed steel stocks:
1. Maintain HOLD on Angang Steel (347, HK$5.68), with a lower target price of HK$6.02 (-29%), based on 5x 2009 earnings and a 20% discount to Posco.
2. Maintain HOLD on Maanshan Iron (323.HK, HK$1.94) with a lower target price of HK$2.2 (-55%), or 3.5x 00 earnings, and a 30% discount to Posco’s 2009F PE.
3. DOWNGRADE Chongqing Iron (1053.HK, HK$1.13) to HOLD with a target price of HK$1.23, or 2.5x 2009 earnings, or a 60% discount to Posco.
These stocks are expected to pay a dividend yield of at least 8% for 2008. So, the scenario worsens considerably, it is hard to call a SELL on them.
Cheers
FOO Choy Peng
Associate Director (China Research)
UOB Kay Hian (HK)
Tel (852) 2236 6798
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