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Baoshan Iron &Steel-A-JPM China Summit 2016:Feedback from the conference

发布时间:2016-06-15    研究机构:摩根大通(亚太)

Baosteel attended J.P. Morgan’s China Summit 2016 in Beijing. Key takeaways include:- a) Domestic steel marketssupported by near term policy support but Baosteel believes that China’s steel demand has peaked, b) Supply likely toslow in the near term on weaker profits and maintenance shuts, c) Iron ore prices to trend lower.

Steel markets – near term policy support, low inventories. China’s current steel capacity is estimated at about 1.1-1.15btpa while last year's utilization was <70%. At present, capacity utilization may be greater than 80%, driven by therestart and increase output. Management expects lower output in June, as some mills are reducing output and increasingmaintenance. At the start of the year, many were expecting a 4-5% decline in demand but this has narrowed in recentmonths. Policy driven demand may drive demand growth periodically, but Baosteel believes that overall steel demandhas peaked and will trend lower. On exports and rising protectionism measures, management expects net export to besimilar to last year.

In the near term, end users are not concerned about supply shortages and are not incentivized to hold large amounts ofinventory while financial constraints may also limit their desire to stock up. In May, automobile output and salesdeclined while home appliances have stabilized at low levels. Baosteel has not seen the improvement in the real estatemarket translating into strong growth in home appliances as yet due to the lagging impact. Management views that realestate and infrastructure are highly policy driven and believes that the government is keen to keep infrastructurespending high to maintain a stable economy. An example is the government’s lowering of the requirement of inter-cityrail transportation from a minimum of 3m population to 1.5m population, indicating higher infrastructure spending.

Infrastructure financing which had largely been sourced from local government land sales in the past, is now supportedby central government budget.

Steel price volatility. Baosteel views the rebound in steel prices earlier in the year as a "technical rebound". Steelprices, profitability, utilization were at multi-year lows, while demand was less bad than the market had expected. Coldrolledproducts first rebounded, driven by stronger than expected auto demand and then it later spilled into other steelproducts, just as seasonal construction demand picked up. Baosteel does not believe that restocking activity was thedetermining factor, with many traders still experiencing financing constraints. If you look at the absolute amount ofinventory, the restock was noticeable even when prices rose. With steel mills keeping low stocks, any improvement indemand will be reflected directly in steel prices. With respect to Baosteel’s recent announcement to cut July contractprices by 3-4% m/m, management stated that they do not always follow the spot prices for our pricing. In 1Q this year,the company raised contract prices but the degree of adjustment was lower than spot, while they raised prices in Juneeven when spot prices weakened.

Industry output and financing. At current prices, management expects to see more maintenance and production haltbut recognize that mills are flexible, so it's difficult to judge the degree of capacity cut as the market is dynamic andthere are too many variables. For zombie companies, Baosteel believes that banks have stopped lending while forprofitable and sustainable steel mills, banks continue to provide capital. Most of the banks are still very risk aversetoward the steel sector. Separately, on the Tangshan Horticultural Expo, which began in April and will end in October,management expects some impact from output control, but believes the overall impact will not be as high as some mayexpect.

Iron ore markets. With China's demand falling, and the rest of the world demand weak, expanding iron ore supplyshould see the market oversupplied and more so in the future. Baosteel expects iron ore prices of US$40-45/t this year.