Hintergrund ist ein positiver Marktkommentar des Brokerhauses Merrill Lynch zur Stahlbranche in China. Kernpunkt ist ein seit dem Tief im Januar stark (über +30 %) gestiegener Stahlpreis sowie besser werdende Zukunftsaussichten für Stahl (Stichwort: aufgebaute Überkapazitäten). Hier ein Auszug der Analyse:
Improved steel price outlook
Steel price in China has rebounded strongly, by over 30% from Jan low. We expect price momentum to persist in the next 2-3 months with an acceptable inventory level and rising demand from domestic and export market.
Longer term we still remain cautious on the 6M-18M steel price outlook, with concern that rising price will encourage production increase. However, we believe the downside room is not big, as the overcapacity problem is not as bad as the market perceived, cost rise has pushed up long term incentive price. And if supply side discipline improved with industry consolidation, there could be positive surprise.
Near term steel price momentum to persist
We expect steel price in China to keep its upward trends in the next 2-3 months; this is mainly due to:
1) Stronger expected downstream demand driven by recovering construction and industry activities and healthy GDP growth;
2) Rising export boosted by solid global demand and large price gap between domestic and global markets;
3) Inventory though has increased still far below last year’s level; thus no near
term selloff pressure from traders. 4) Resuming market confidence with major steel mills lift selling prices consecutively.
Long term cautious but downside room not big
We remain cautious on a longer term 6M-18M steel price outlook, with concern that rising domestic steel price will encourage production increase and discourage export. We expect the steel price to stabilize in 3Q06 and face pressure again by 4Q06 or 1Q07.
Despite remaining cautious, we believe the longer term steel price outlook is better than we have expected before, due to the reasons below. We now forecast 2007 steel price to average 5% below 2006, better than previous forecast of 10% drop.
Overcapacity not as bad as market perceived
NDRC has forecast China’s steel capacity has reached 470mn tones by the end 2005 and there is 70mn tonnes additional capacity under construction. However, we believe this number included some dead capacity which cannot change to real production, due to
1) Unmatched iron, crude steel, casting and rolling capacity within the company;
2) High cost or lack of availability of raw material or power, such as EAF steel mill or some small steel mill that have to buy iron ore in spot market but without import license;
3) Has exited the market during price trough in Dec 05 or Jan 06 due to loss making.
We are more sympathetic to China Iron & Steel Association’s survey numbers of 420mn tonnes capacity by the end of 2005 and 460mn tonnes capacity by end of 2006, which indicate a capacity utilization rate of 87.6% for 2005 and 84% for 2006. The ratio would be close to 90% if using year average capacity instead of year-end capacity, given that it takes time for new capacity to ramp up production. At this level of utilization rate, we don’t think the overcapacity problem will lead to big correction of the steel price.
Cost rise push up long term incentive price
We estimate current industry average cost for HRC is about US$350/ton if considering the iron ore price hike which is currently under negotiation. Assuming SG&A to be 5% of revenue and a 33% tax rate, 50% liability ratio, we estimate to achieve 10% ROE, which we believe is long term incentive, we need HRC price of US$420/ton, only 7% below current price.
Table 3: Incentive steel price @10% ROE Rmb US$
HRC price 3,350 419
Industry average cost-HRC 2,800 350
Per ton gross profit 550 69
SG&A 168 21
Tax 126 16
Per ton profit 256 32
Per ton investment 5,000 625
ROA 5% 5%
Liabilities/assets 50% 50%
ROE 10% 10%
Source: Merrill Lynch estimates
As it happened in metals sector, we believe at least more than half of the cost rise in recent years is permanent and will not return back to its historical levels, such as iron ore and coal mining cost and labor cost, etc. We would say in future any price below US$380 for HRC will be not long-term incentive and thus can be regarded as price bottom, and in near term next 1-2 years, given that we believe iron ore price is unlikely to drop, steel price should remain above US$400.
Industry consolidation may provide positive surprise
In addition, we believe China steel industry has entered into an M&A and industry consolidation stage. Government target to increase the top 10 steelmakers’ market share from current 30% to 50% by 2010, and create 2 super big steel groups with steel capacity over 30mn tonnes, and several big steel companies with production over 10mn tonnes. The major practices to achieve this include:
1) Shutting down 100mn tonnes blast furnace with size below 300m3 and 55mn tonnes crude steel capacity with BOF below 100ton. 2) Any Greenfield capacity will have to be built for the purpose of replacing old existing capacity. Principally no approval on purely capacity expansion.
3) Encourage across-region acquisition and consolidations.
4) Improve industry geographical allocations and implement more strict technology, energy saving and environmental protection standards.
In the past years, we have already seen a lot of M&A and strategic alliances both between China steel mills and between foreign steel companies with local steel companies, such as
1) Angang parent co. merged with Benxi steel group
2) Wuhan steel acquired Liuzhou steel and Echeng steel
3) Tangshan steel has merged with Xuangang steel and Chengang
4) Baosteel entered into strategic alliance with Maanshan steel and Bayi steel
5) Mital acquired shares of Hunan Valin
6) Arcelor acquired shares of Laiwu steel
We believe more is to happen in the near future. The shutting down of small steel mills and M&A between big steel companies are likely to increase industry concentration and bargaining power and improve supply discipline, which would be good for the industry’s long term sustainable development and provide positive surprise to steel price.