20170619-三星证券-Iron_ore_supply_heading_up,_steel_down_38页_2mb

Sector Update Summary

Core Content

This document provides an analysis of the steel industry, focusing on the outlook for the second half of 2017 (2H17) and the performance of three South Korean steel companies: Posco, Hyundai Steel, and SeAH Steel. The report highlights the recovery in steel demand driven by China's fiscal policies and infrastructure projects, as well as the impact of iron ore price trends on the steel industry.

Main Points

1. Steel Supply and Demand Dynamics

• From 2010 to 2015, steel supply outpaced demand, leading to a price decline.
• Starting in 2016, supply and demand moved in tandem, with steelmakers reducing capacity expansions and China's restructuring efforts.
• This shift has improved supply-demand dynamics, positively impacting steel prices and spreads.

2. China's Fiscal Spending and Steel Demand

• China is expected to increase fiscal spending in 2H17 to support the economy, especially ahead of the second leadership transition in October.
• The designation of Xiongan New Area as a special economic zone and the One Belt, One Road (OBOR) policy are seen as catalysts for increased steel demand.
• Infrastructure investments are estimated to boost annual steel demand in China by 1.6% due to Xiongan development and 3.1% due to OBOR.

3. Iron Ore Price Trends

• Iron ore prices have declined due to rising supply, particularly from China's increased production after two years of decline.
• However, the decline is not expected to hurt the steel industry significantly, as Chinese miners have low cost competitiveness and OBOR is likely to increase iron ore demand.
• Iron ore prices are currently near their bottom, with a spot price below the cash cost of Chinese miners.

4. Steel Spread and Industry Outlook

• Steel spreads are expected to remain solid due to improving supply-demand dynamics and fiscal stimulus.
• The historical correlation between steel spreads and utilization rates supports the view that steel spreads will widen as demand recovers.

Key Information

2H17 Outlook

• Posco is recommended as the top pick for 2H17 due to its strong operating leverage and undervaluation (P/B ratio of 0.5x).
• Hyundai Steel is expected to benefit from auto-use steel plate price hikes and is also recommended for its potential recovery.
• SeAH Steel is highlighted for its potential to benefit from a recovering US rig count.

Financial Impact Estimates

• Xiongan New Area development is estimated to increase steel demand by 1.6% and widen steel spreads by USD10/tonne.
• One Belt, One Road initiative is projected to increase steel demand by 3.1% and widen spreads by USD18/tonne.
• The impact on Posco includes a 9.9% increase in operating profit and a 40% rise in market cap.
• Hyundai Steel is projected to see a 14.3% increase in operating profit and a 53.9% rise in market cap.

Valuation Metrics

• Posco: P/B ratio of 0.53x in 2017, with an estimated ROE of 4.5%.
• Hyundai Steel: P/B ratio of 0.45x in 2017, with an estimated ROE of 5.8%.
• SeAH Steel: P/B ratio of 0.4x in 2017, with an estimated ROE of 6%.

Target Prices

• Posco: Target price of KRW380,000 (up 38.4% from current price).
• Hyundai Steel: Target price of KRW70,000 (up 18.6% from current price).
• SeAH Steel: Target price of KRW130,000 (up 39% from current price).

Company Reports

Posco

• Expected to benefit from the industry upturn with potential upside.
• Improved results at subsidiaries and a strong position in the market.
• Estimated operating profit increase of 9.9% and ROE of 4.9% with Xiongan development effect.
• Market cap expected to rise by 39.3%.

Hyundai Steel

• Auto-use steel plate price hikes and OBOR effects are expected to drive performance.
• Operating profit is projected to increase by 14.3% and ROE by 0.6% with Xiongan development effect.
• Market cap expected to rise by 52.8% with OBOR impact.

SeAH Steel

• Recovery in US rig count and OBOR initiatives are key growth drivers.
• Market cap expected to rise by 53.9% with OBOR effect.

Conclusion

The steel industry is poised for recovery in 2H17, driven by China's fiscal expansion and infrastructure projects. While iron ore prices have declined due to increased supply, the steel industry is expected to remain resilient. Posco is the top pick due to its strong position and undervaluation, while Hyundai Steel and SeAH Steel are also noted for their potential. Investors are advised to shift focus from supply to demand in the steel sector.