China Steel Sector Supply and Demand Outlook Helen Lau Senior Analyst (Metals and Mining) UOB Kay Hian (Hong Kong) Tel.: (852) 2236 6749 helen.lau@uobkayhian.com.hk November 2012 1
Steel Price Recovery Steel Prices Rising on Low Inventory mt 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 - Mar-06 Aug-06 Dec-06 May-07 Sep-07 Feb-08 China traders' inventory Spot HR steel prices Spot Wire Rod Prices Jul-08 Nov-08 Apr-09 Aug-09 Jan-10 Jun-10 Oct-10 Mar-11 Jul-11 Dec-11 May-12 Sep-12 Rmb/t 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 Daily steel production is easing China Daily Crude Steel Production (mt) 2.1 2 1.9 1.8 1.7 1.6 1.5 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Source: Nysteel Source: CISA Steel price will on track to recover, because Traders inventory is at year-to-date low. Seasonality and Festive days (through winter) will lead to lower production. 2
China Economy Bottoming Out Fixed Asset Investment (FAI) accelerated: 20.7% yoy in 10M2012, up from 20.5% in 9M2012. Investment in real estate development rose 15.4% yoy in 10M2012, flat from 9M2012. Industrial Production rose 9.6% yoy in October, accelerated from 9.2% yoy in September and 8.9% in August. General equipment production: uo 7.1% yoy Automobile production, up 5.9% yoy Railway and other logistic equipments production: up 6.1% Electrical machineries production: up 7.9% yoy Telecom and electronic equipments production: up 10.1% Retail consumption rose 14.5% yoy in October, up from 14.2% in September, extended the 3rd month acceleration Export also grew faster at 11.6% yoy in October, up from 9.9% in September Purchase Managers Index (PMI) rose back to +50 expansion level to 50.2% in October, up from 49.2 in August and 49.8 in September 3
China Steel Demand by Sectors Oil/Petrochem, 1.4% Railway, 1.2% Others, 16.7% Shipbuilding and container, 3.4% Autombile, 3.9% Construction, 48.5% Light industry (white goods), 7.7% Source: UOB Kay Hian Machinary, 17.2% 4
China Steel Demand Forecast China Steel Demand to increase by 3-5% yoy in 2012-2015, decelerated from 8% yoy growth in 2011 Source of demand drivers are Infrastructure Home Appliances Automobiles Machinery Oil/PetroChem No signs of demand recovery from property construction Shipbuilding 5
China Steel Demand Breakdown mt Breakdown 2011 2012 2013 2014 2015 Property 33% 225 225 220 213 205 Infrastructure 18% 114 123 130 134 136 Machinary 17% 109 117 124 130 135 Home appliances 8% 50 53 56 59 61 Autombile 5% 32 34 36 38 39 Shipbuilding and container 3% 27 23 22 21 21 Oil/Petrochem 1% 9 9 9 9 9 Others 14% 96 97 97 95 91 Total 650 681 710 737 762 % yoy growth Property 0% -2% -3% -4% Infrastructure 7% 6% 3% 2% Machinary 7% 6% 5% 4% Home appliances 6% 6% 5% 4% Autombile 7% 6% 5% 4% Shipbuilding and container -15% -5% -5% -2% Oil/Petrochem 3% 1% 0% 0% Others 2% 0% -3% -4% Total Steel Demand 5% 4% 4% 3% Source: UOB Kay Hian, CEIC 6
Positive Impact from Macro Policy Shifts The new leadership will continue last leadership s legacy with mild changes. Last leadership has already layout plans for China s futures in 10 years. China will aim to double per capita income to 2020. China will redistribute wealth to their people. China will have more fiscal spending, not on construction, but more on health care, education, environment protection, job securities, etc. China will continue to make efforts to cut carbon emission and target to cut the emission by 20% in 2020 from 2010. China will be shifting from investment-focused economy to consumption focused economy. 7
China Steel Supply & Demand Forecast 2009 2010 2011 2012 F 2013 F 2014 F 2015 F FAI Rmb bn 19,414 24,141 30,193 36,534 44,023 52,828 63,129 % yoy 31.0% 24.4% 25.1% 21.0% 20.5% 20.0% 19.5% Pig iron production mt 544 590 630 662 698 728 756 % yoy 16% 9% 7% 5% 5% 4% 4% Crude steel production mt 568 627 683 720 759 791 821 % yoy 13% 10% 9% 5% 5% 4% 4% Steel import mt 18 16 16 16 16 16 16 Steel export mt 25 43 49 55 65 70 75 Steel demand mt 561 601 650 681 710 737 762 % yoy 23% 7% 8% 5% 4% 4% 3% Crude steel demand per unit FAI tonnes 28,891 24,875 21,526 18,628 16,120 13,950 12,072 % yoy -6% -14% -13% -13% -13% -13% -13% Steel Production Capacity mt 718 800 850 900 920 938 957 % yoy 11% 11% 6% 6% 2% 2% 2% Utilization % 79% 78% 80% 80% 83% 84% 86% Source: UOB Kay Hian 8
Chronic OverSupply Over mid term, China will still be in structural oversupply Steel Production Capacity in 2012 will be +900mt Difficult to close down old capacity Local governments reluctant to close down production capcity, because of concern on unemployment issue and tax revenue Large SOEs seldom lay off employees because of concern on social stability. Large steel SOEs who have been loss making can still have access to financings or credit lines from SOE banks, even if their debt to equity ratio or gearing have been around 70-80%. 9
China Steel Industry Consolidation China Large Steel SOEs Capacity Expansion By 2015 Company Location/Province mt Angang Group/"Big Angang" Angang listed company Liaoning 25 Pangang Sichuang 10 Bengang Liaoning 20 Sangang Fujian 10-20 Linggang Liaoning 5 Total 70-80 Baosteel Group Baosteel listed company Shanghai 33 Bayi Xinjiang 10 Zhanjiang Guangdong 10 Ninggang Jiangsu 10 Shaogang Guangdong 5 Total 68 Wugang Group Wugang listed company Hubei 20 e'gang Hubei 5 Fangchenggang Guangxi 10 Liugang Guangxi 10 Kungang Yunnan 10 Brazil JV Brazil 5 Total 60 Source: UOB Kay Hian 10 Market Share of Top 10 Steel Companies in China 1,000 900 800 700 600 500 400 300 200 100 - China Crude Steel Production (mt) (LHS) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: UOB Kay Hian % of market share in top 10 (RHS) 70% 60% 50% 40% 30% 20% 10% 0%
Other Measures on Supply Reform on SOEs Increase profitability and efficiency by allowing involvement from private enterprises. Reform on Banking and Financial Sector No more easing lending to loss-making SOEs More strict on control on bad loans More stringent on enforcing measures on energy efficiency and carbon reduction New projects approvals are conditioned on having met environmental protection standards. Existing steel mills have to install expensive environmental protection equipments 11
Thank You! 12
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