Price rises lead by unwinding of Asian mispricing
Steel prices have started to rise in China in recent weeks. This comes after 6 months of falling domestic flat prices, as Chinese dealers delayed restocking. In 2008E, we are increasing our price forecasts by 16% in Asia to $630/t, in US by 5%, and by 9% in Europe, and in 2009, our forecasts in most regions have been increased by 13%. We have not changed our Chinese RMB prices.
Steel price should rise into 2009E
With rising raw materials costs, slab prices should rise. Steel companies could retain pricing power for the next 3yrs at least, in our view. Our supply demand suggests that the world would need Chinese steel, and as the RMB appreciates, and raw material costs rise, the world would have pay China to export steel through the currently high, and potentially rising, tax barriers
Raising steel price forecasts on higher raw material prices
We are now forecasting a 30% price rise for iron ore and a coking coal prices in JFY2008E - this will likely increase the slab production cost by around $45/t. We expect global steel supply/demand to remains tight, ensuring that the steel producers maintain their pricing power, allowing them to pass through these raw material price pressures via higher steel prices. On average we have raised our HRC forecasts by US$30/t in FY08 and US$15/t in FY09.
Stock selection by region:
Europe: ArcelorMittal - additional margin benefit from higher iron ore prices given produces 50% of its own requirements; consensus too conservative on medium term EBITDA hence trading on just 7x FY09E EPS.
Americas: Nucor and Steel Dynamics, Usiminas and CSN
Asia: Sumitomo, Kobe, and Bluescope
