China Steel Sector:Orders and profit improve sequentially

Event

    Results from the April steel survey reveal a sequential improvement inmarket conditions. Our proprietary China steel survey (see ‘China steel andcopper surveys: Sequential improvement finally arrives’ by Graeme Train, 22April) shows infrastructure orders are playing a meaningful part in the uptick,and construction demand is also returning. Mills’ capacity utilisation andprofitability have increased sequentially from the trough in March. Themarket’s seasonal recovery and low inventory point to a supportiveenvironment for prices over 2Q15.

    Impact

    Both infrastructure and construction turn positive. Infrastructure ordersshow further MoM improvement in April, and the construction sectorrecovered to a positive growth trajectory after a decline in March, leading tosome domestic market improvement. Export orders also seem to bestabilising, as arbitrage between China and most major markets remains atlevels similar to last year’s, which suggests exports should be able to maintaina reasonable level.

    Utilisation rate and profitability also improve. Most mills indicated a smallincrease in capacity utilisation in April, a move probably encouraged by arecovery in profitability from the previous trough. Our weekly data shows mills’margins have recovered gradually since March from the low level duringChinese New Year. Both mills and traders reported a decline in inventory inApril, and our weekly inventory data also suggests that steel stocks in keycities have been declining since mid-March to the current ~14mnt, lower thanthey were a year ago.

    1Q profit result weak; recovery likely in 2Q. Angang has announced aprofit alert on a significant earnings yoy decline in 1Q15, and we expect othersteel names would see similarly weak profit results. Maanshan has thehighest earnings sensitivity to steel price changes, and thus we expect a likelynet loss result for Maanshan in 1Q15. Baosteel would see an earnings, but ales steep one, as lower earnings sensitivity and the price hike in orientedsilicon steel partially offsets price declines in other products. Looking into 2Q,we expect a margin recovery, with demand seasonally picking up and loweriron ore price on new overseas supply.

    Outlook

    We maintain the view of a continued gradual margin recovery in the steelsector, and expect mills’ profitability to pick up in 2Q