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Steel:Iron ore and steel prices still rising

发布日期:2016-03-24    点击:1921

Prices still rising: Iron ore and Chinese steel prices have been rising since December.

We attribute the strength in the first month of such a trend to a technical rebound (steelprices were below cash costs before December) and low inventories at distributors. In thesecond month, the increase owed much to rising iron ore prices (up 22% the past month)backed by: 1) lower-than-expected 2016 production targets at global miners; 2)seasonally-strong steel production and inventory buildups in China after the Lunar NewYear holidays; and 3) Anglo American—the world’s fifth largest producer of iron ore—pushing to sell its stake in Kumba Iron Ore. If Anglo American is unable to find a buyer, itmay shutter that business, but any effects on supply should take some time as such amove would take at least 18 months. That said, sentiment for iron ore prices shouldremain favorable in the short term.

Positive for shares: Considering that steel inventory buildups and strong iron ore andsteel product prices usually follow the Lunar New Year holidays, it is premature to sayrecent price hikes signal the start of a full-blown recovery. Moreover, iron ore prices maystop rising as: 1) Anglo American’s iron ore mine is likely to run at maximum productionuntil it is sold; and 2) the Roy Hill mine in Australia should start operations this year.

That said, the unexpected hikes in steel and iron prices combined with low valuations arepositive to Korean steelmakers’ shares in the short term. Korean furnace companies arelikely to see earnings improve in the short term as domestic CRC prices seem set to risefollowing a recent markup of HRC prices. In particular, expectations for Posco’s 1Qoperating profit should rise as the firm is likely to benefit from lag effects—eg, thepurchase price of raw materials is recognized as a production cost. In sum, sentiment forKorean furnace companies should remain favorable for the time being, and investorsought to keep monitoring sustainability of the steel price uptrend by watching forrestructuring of in China or a recovery of demand.