Steel Market Output To Fall In 2009

This story features BLUESCOPE STEEL LIMITED, and other companies. For more info SHARE ANALYSIS: BSL

By Chris Shaw

The steel market tends to be a good barometer of the health of the global economy given its use in a wide range of industries and applications, unfortunately, the steel manufacturing forecasts of industry consultant MEPS suggest the economic downturn has not yet fully run its course.

The group expects total world steel manufacturing output in 2009 of 1,165 million tonnes, which would be a decline of 12% from 2008’s output of 1,326 million tonnes. China and the Middle East are the only regions expected to lift output this year, the former expected to record the only significant increase to 516 million tonnes against 500.5 million tonnes last year.

Elsewhere some large declines in output are expected, MEPS forecasting NAFTA region output to decline to 82.7 million tonnes from 124.5 million tonnes last year, while in the EU27 nations the group sees production falling to 141.5 million tonnes against 198 million tonnes in 2008.

It is a similar story in South America as the group sees production hitting just 36.3 million tonnes this year against 47.5 million tonnes last year, while in Japan the forecast is for a decline to 88 million tonnes from 118.7 million tonnes and for Oceana output is expected to reach only 5.7 million tonnes against last year’s 8.4 million tonnes.

The group’s forecast reflect very weak demand conditions early this year as while more recent data suggest some signs of improvement such as a pick-up in automotive production around the world, construction activity, apart from in China and some emerging Asian nations, is proving slow to recovery, so limiting the pace of any increase in demand for steel.

As well, Citi notes while Chinese steel production is currently at record levels end-user demand is not as strong, while anecdotal evidence indicates there has been a large amount of speculative buying in apparent consumption figures. The broker also argues while there have been significant stimulus measures in China, the package is yet to flow through to the real economy as both residential and commercial construction data remain quite weak.

In China specifically Citi suggests the outlook for long products is strong given current utilisation rates of around 90% and low inventory levels but the same cannot be said for the flat products market as here utilisation is down at around 55% and inventories are far higher. This excess flat capacity is beginning to enter the world market, a trend it suggests could continue if domestic flat prices don’t fall.

In the European market the broker suggests the worst is probably behind us as the inventory de-stocking cycle appears to finally be coming to a close but that is the good news, as still weak economic conditions mean future demand doesn’t look particularly strong.

This is enough for the broker to remain cautious on the fundamentals of the global steel market, which flows through into its view on the three major Australian-listed players, Bluescope Steel ((BSL)), OneSteel ((OST)) and Sims Metal Management ((SGM)).

Citi has a Sell rating on Sims given the potential for scrap prices and exchange rates to impact on earnings, likely unfavourably more than favourably in its view. Both Bluescope and OneSteel are rated as Hold, the former given it appears reasonably priced at current levels given its sensitivity to HRC (hot rolled coil) prices and the latter given the risk of increased steel imports into the Australian market and what also appears to be a reasonable valuation at current levels.

UBS is more specific with where it sees earnings risk, the broker pointing out the risk for Bluescope is to the downside given its reduced production levels and even allowing for the fact management has already indicated earnings for the second half of FY09 will be negative.

The broker is currently forecasting profit for the current year of $165 million and earnings per share (EPS) of 27.6c, both of which are above consensus estimates of $152 million and 17.5c respectively and this highlights the downside risk the broker is referring to, though it adds outlook comments for 2010 and any details on when the company may look to re-start the blast furnace currently out of commission are likely to be more important than the upcoming profit result itself.

For OneSteel, UBS sees a chance for earnings guidance to be beaten as the latest guidance was given back in April and since then spot prices for steel, scrap and iron ore have all risen. The broker is currently positioned broadly in line with market forecasts for the stock, expecting net profit of $198 million against consensus of $200 million and EPS of 22.5c against consensus of 20.3c.

With respect to Sims, the broker points out while scrap prices rose in the June quarter there was also some margin pressure given tighter scrap supplies, so this could be an issue in what should otherwise be a strong quarterly result. Currently the broker is forecasting net profit of $105 million against consensus of around $90 million, while in EPS terms it expects 57.9c against consensus of 53.7c.

In terms of ratings, UBS has Bluescope and OneSteel both as Buys and it rates Sims as Neutral, while the FNArena database shows respective ratings of five Buys, four Holds and one Reduce on Bluescope, two Buys, seven Holds and one Sell on OneSteel and one Buy, five Holds and four Sells on Sims.

In trading today their respective share prices are all higher and as at 2.10pm Bluescope was up 11c or more than 4% at 2.44, OneSteel was up 13c or more than 5% at $2.52 and Sims was trading up 84c or 3.5% at $24.92. These prices compare to average price targets according to the FNArena database of $2.87 for Bluescope, $2.70 for OneSteel and $20.91 for Sims.

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