China Pulse Check: Steel Sector

Transcription

1 Equity Research Sector Watch China Pulse Check: Steel Sector Prices to grow moderately in May, sector earnings to improve significantly Ou Yafei SFC CE No. BFN GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Contribution from the GF A-share research team: Li Sha * lisha@gf.com.cn * Please note that Li Sha is not a registered licensee with the Securities and Futures Commission of Hong Kong and is not allowed to conduct regulated activities in Hong Kong. Demand The politburo meeting on April 23 pointed out that domestic demand was stronger in 1Q18, and proposed continued expansion in this demand. Given this and the PBoC s 1pp RRR cut for large commercial banks, joint-stock commercial banks, city-level commercial banks, non-county rural commercial banks, and foreign banks, overall policy has eased. Property investment significantly beat expectations, coming in up 10.4% in 3M18, 3.4pp higher than in 2017 and up 0.5pp on 2M18. 3M18 property new starts grew 9.7%, up 2.7pp on 2017 and up 6.8pp on 2M18. Infrastructure remained relatively weak, with 3M18 investment up 9-10%. Given the government s aim to expand domestic demand, the loose credit & neutral monetary policy, and the rebound in property investment and new starts, we believe demand which has been suppressed due to seasonal factors and production suspensions given environmental protection efforts will be released in May, and that the extent of the demand recovery may significantly exceed market expectations. Supply With previously restricted capacity resuming operation, estimated national daily production in mid-april reached 2.44m tonnes/day. According to Mysteel, on May 4, operating blast furnace capacity at Tangshan steel mill reached 2.3m tonnes/day, exceeding the March-Sept 2017 average of 2.22m tonnes/day and the peak level of 2.27m tonnes/day. We believe previously restricted blast furnaces gradually resumed operations in April, and therefore see a limited marginal increase in operating capacity. Coupled with stricter implementation of environmental regulations, we expect a limited marginal increase in supply. In terms of steel inventory, as of May 10, 2018, dealers inventory of key steel products stood at m tonnes, down 5.82% MoM but up 8.63% YoY. In mid-april, inventory at steel mills was 14.59m tonnes, up 1.46% MoM and 0.23% YoY. During the first nine weeks of destocking, rebar inventory dropped 90k, 360k, 550k, 620k, 520k, 630k, 530k, 440k and 550k tonnes respectively. Eliminating the holiday effect, the declines come in at 20k, 70k, 110k, 120k, 130k, 130k, 110k, 110k and 110k tonnes respectively. In terms of absolute value, rebar inventory at dealers stood at 6.52m tonnes after the ninth week of inventory reductions, which represents 60% of peak inventory this year. On average, this was 72% during , indicating faster inventory reductions compared with previous years. Raw materials According to Mysteel, as of May 4, 2018, coke inventory at 110 steel mills amounted to 4.63m tonnes, up 1.12% MoM, and above the peak value of 4.60m tonnes in Average inventory days of imported iron ore on the same day stood at 29 days, down 2 days MoM, and up 6 days YoY. As for raw materials supply, utilization of coking ovens at 100 independent coking plants reached 77.74%, up 1.87pp MoM but down 1.47pp YoY. As of April 27, 2018, port inventory of iron ore reached m tonnes, still at a historical high. As supply has exceeded demand for upstream raw materials, we expect a weaker price trend than that for finished steel products. As demand has been suppressed in Jan-Feb 2018 and with the production suspension during the winter heating season, the demand recovery may be stronger than in previous years. We also expect the demand recovery to be stronger than supply growth, and the overall supply and demand condition to improve. Moreover, we expect steel prices to rise moderately in May and earnings to continue to improve. Our top picks for May are Fangda Special Steel Technology ( CH), SGIS Songshan ( CH), Nanjing Iron & Steel ( CH), Xinyu Iron & Steel ( CH) and Baoshan Iron & Steel ( CH). (Continued on next page ) This is a summary of a report originally written in Chinese. Please contact us for more information of the original report. The Chinese version shall prevail in the event of any discrepancy between the two versions.

2 Steel sector earnings slid in April, but should rise in May In April 2018, earnings from key steel products picked up across the board, with the gross profit for rebar, hot-rolled and cold-rolled steel all up on the previous month. For specific products, according to Mysteel, in April 2018, average gross profit of rebar per tonne was Rmb1,239.45/tonne, hot-rolled was Rmb1,260.91/tonne and cold-rolled steel was Rmb1,019.24/tonne. In May 2018, the rebound in steel demand may be stronger compared to previous years, resulting in improving demand and supply conditions. We expect steel prices to grow moderately in May and sector earnings to improve significantly. Risks A significant economic downturn, steel exports missing expectations, production cut enforcement weaker than expected, and coordinated price cuts by major iron ore producers. 2

3 Key data point snapshots Figure 1: 3M18 cumulative FAI up slightly YoY Figure 2: 3M18 growth in cumulative ferrous metal FAI weakened significantly MoM 3

4 Figure 3: March daily average crude steel output up significantly MoM Figure 4: March crude steel output up strongly YoY Figure 5: March crude steel apparent consumption up sharply YoY Figure 6: Cumulative crude steel apparent consumption up significantly YoY in 3M18 Sources: NBS, General Administration of Customs, GF Securities Development & Research Center Sources: NBS, General Administration of Customs, GF Securities Development & Research Center 4

5 Figure 7: 10D interval inventory at medium/large steel companies up slightly YoY Figure 8: Steel dealers inventory continued to decline in April (10k tonnes) Sources: China Iron and Steel Industry Association, GF Securities Development & Research Center Sources: GF Securities Development & Research Center 5

6 Figure 9: Key operating data for steel-related downstream industries (3M18) 3M18 YoY Monthly YoY 3M18 2M18 March 2018 Dec 2017 FAI (Rmb 100m) Property investment (Rmb 100m) Property under construction (10k sqm) Property new starts (10k sqm) Property completion (10k sqm) Property area sold (10k sqm) Property sales (Rmb 100m) Metal-cutting machine tool output (10k units) Industrial boiler output (tonnes of evaporation) Locomotive output (unit) Auto output (unit) Auto sales (10k units) Household refrigerator output (10k units) Household washing machine output (10k units) AC output (10k units) Shipbuilding completions (10k DWT) Civilian steel ship completions (10k DWT) New shipbuilding orders (10k DWT) Shipbuilding orders on hand (10k DWT) % 7.20% 7.13% -2.29% % 7.00% % 2.38% % 3.00% 3.76% -5.86% % 7.00% 17.79% 8.64% % -4.40% -5.30% % % 7.70% 3.17% 6.14% % 13.70% 6.19% 20.47% % % % % % -5.33% % -9.30% % 16.10% % 37.56% % 3.19% 0.94% -0.70% % 3.04% 4.46% 0.10% % -6.15% -2.60% 3.70% % -1.57% -2.40% -2.50% % 12.40% 8.40% 21.40% % 20.84% % % % 2.86% -2.70% % % 60.09% % % % % % % Sources: NBS, China Association of Automobile Manufactures, GF Securities Development & Research Center 6

7 Figure 10: Cumulative property investment up significantly YoY in 3M18 Figure 11: Cumulative infrastructure investment down slightly YoY in 3M18 7

8 Figure 12: Long product price index down sharply; flat product price index down slightly Figure 13: Both closing and settlement prices of active rebar futures contracts weakening Sources: GF Securities Development & Research Center Sources: Wind, GF Securities Development & Research Center 8

9 What else is in the GFS China Pulse Check? * The GFS China Pulse Check series offers speedy updates on industry data and exclusive insights into both short-term and longer-term trends. Its expanding coverage currently includes the following monthly issues. Steel sector update: Supply and demand analysis, raw material prices, steel and iron ore prices, outlook on the coming month. Steel trade data update: Steel product exports, iron ore imports, steel product profitability, outlook on the coming month. Crude steel output update: Monthly and daily crude steel/pig iron output, outlook on the coming month. Coal sector update: Thermal coal, coking coal and anthracite prices; supply and demand analysis; outlook on the coming month. Property sector update: Policy review, property transactions, land supply and sales, liquidity supply for developers and home buyers. Auto sector update: Auto total sales and breakdown, raw material costs. Building materials sector update: Cement/glass output and prices, downstream industry (property and infrastructure) sales and investment growth. 9

10 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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