20141030-美银美林-Steel_Road_potential_impacts_from_an_export_rebate_cut_18页_1mb

Steel Road: Potential Impacts from an Export Rebate Cut

Core Content Overview

This report discusses the potential impacts of an export rebate cut on the Chinese steel industry and its global implications. The government is considering reducing export rebates to curb the rapid increase in steel exports, which have risen by +39% YoY this year. The report outlines the reasons behind this potential policy shift, the expected effects on export volumes and company earnings, and the broader implications for global steel producers.

Main Reasons for Export Rebate Cuts

• Control of steel capacity and pollution: High export levels have allowed Chinese steel companies to maintain production and profitability despite weak domestic demand, undermining efforts to control overcapacity and reduce pollution.
• Limited iron ore resources: China relies heavily on imported iron ore, which has raised concerns about the sustainability of the industry and the societal value of exporting steel at the expense of importing iron ore.
• International pressure: Countries like the US have become increasingly hostile to Chinese steel exports, perceiving them as dumping, and restricting exports may be a way to appease foreign concerns.

Expected Impact on Exports

• Overall forecast: A -11% decline in steel exports for 2015 is expected.
• Volume vs. price: While export volumes are likely to decrease, the year-on-year (YoY) drop is not expected to be extreme. The report suggests a combination of higher export prices and lower export volumes due to some companies passing on part of the rebate reduction to customers.
• Timeline: Export rebates may be cut as early as 1st January 2015.

EBITDA Impact on Chinese Steel Companies

• Limited impact: The report estimates that the EBITDA impact on Chinese steel companies from rebate removals is relatively low, with a worst-case scenario of 2-4%.
• Export exposure: The export exposure across the industry ranges between 3-15% of total sales.

Historical Context of Export Policies

• Past policy changes: The government has historically adjusted export rebates and tariffs to manage steel exports. Key changes include:
  • May 2005: Rebates cut.
  • Sep 2006, Apr 2007, Jul 2007: Further rebate cuts.
  • 2009: Policy reversed with some rebates offered post-GFC.
  • 2010: Some rebates were removed again.
• Current focus: The policy has shifted to discourage exports of low-value products like rebar and slab while supporting higher-value products such as CRC, HDG, and stainless steel.

Global Impact and Beneficiaries

• Positive impact on global producers: The reduction in Chinese export prices has been a drag on global pricing power. A rebate cut would likely benefit global steel producers.
• Key beneficiaries:
  • POSCO: As China's largest export market, Korea's steel sector could benefit.
  • ArcelorMittal: The report mentions the firm is a buyer of ArcelorMittal, which is the world's largest steelmaker by volume.
• Global steel valuations:
  • Greater China: P/E ratio ranges from 28.5x to 16.7x.
  • Korea: POSCO has a P/E of 20.1x.
  • Japan: Daido Steel and Hitachi Metals show varying valuations.
  • India: JSW Steel and others have P/E ratios ranging from 15.2x to 33.9x.
  • Europe: ArcelorMittal and ThyssenKrupp AG have P/E ratios ranging from 24.5x to 134.2x.
  • North America: Companies like Nucor and Steel Dynamics show P/E ratios between 11.1x to 26.9x.

Steel Supply-Demand Model

• China's crude steel production: Has shown steady growth over the years, with a +3.4% YoY growth in 2015.
• Finished steel production: Also growing, with a +4.5% YoY growth in 2015.
• Net exports: Expected to decline in 2015, from -66.0 in 2014 to -58.6.
• Capacity utilization: Remains relatively high, at 83% for 2015.
• Capacity additions/closures: A net addition of 28.2 in 2015.

Key Charts

• Chart 1: China crude steel output annualized.
• Chart 2: China average steelmaker net profit margin per tonne.
• Chart 3: Price differential between China and EU/US prices.
• Chart 4: Steel total inventories.
• Chart 5: Chinese inventories of imported iron ore.
• Chart 6: Steel and raw material prices.
• Chart 7: Total steel monthly exports overlaid with policy changes (red = restrictive, blue = supportive).

Summary of Rebates and Tariffs for Key Steel Exports

Conclusion

The report suggests that an export rebate cut is increasingly likely and may have a moderate impact on Chinese steel companies, with minimal effect on their EBITDA. The policy shift is expected to lead to a decline in export volumes and an increase in export prices, with the potential to benefit global steel producers like POSCO and ArcelorMittal. The historical context of export policy changes indicates that such measures are not new and have been used before to manage the industry's export levels. The report provides a comprehensive analysis of the steel industry's performance and the implications of export rebate cuts.