Commodities | Mar 13 2007
By Chris Shaw
In August last year SB Citigroup downgraded its outlook for steel prices to reflect China moving to a net export position and the less than optimistic demand picture being painted by a slowing US economy.
Prices have not responded as expected though, the broker noting since the start of this year steel prices in Asia have risen by between 5-30% depending on the product. These price increases have been driven by a number of factors, including strong consumption growth in China, the Middle East and Europe as well as tight scrap and pig iron supplies from traditional markets such as Russia and Brazil.
While the broker points out the supply and demand data from China doesn’t support the consumption growth story, Merrill Lynch notes there appears little unwanted supply available domestically in that market as producers have rushed to export given the fear of possible retrospective export tax increases being applied in coming months.
The broker also suggests the Chinese economy should pick up steam from May as is traditionally the case, an outcome likely to add to the unexpected tight supply position and so support prices.
While supplies are down from both Russia and Brazil they are also down from the Combined Independent States (CIS), Citigroup noting milder than usual weather has strengthened domestic demand and so forced producers to allocate their output to domestic markets.
All this suggests further price gains are likely, Citigroup suggesting steel prices could add as much as another 10% over the next three months or so. Merrill Lynch agrees, taking the view producers are attempting to stabilise prices at current levels before a further move higher.
This positive outlook has led to an 11% increase in Citigroup’s price forecast for HRC (hot rolled coil) for FY08 to US$525 per tonne, while it has increased its scrap metal price forecasts by around 20% to US$305 per tonne.
The broker sees the major beneficiaries in the Australian market as BlueScope (BSL) and Sims Group (SGM), as these companies are the most leveraged to its higher forecasts. The impact is most pronounced for BlueScope, the broker lifting its earnings forecast for FY08 by 27% to 75.9c. This is enough to justify an upgrade in rating to Hold from Sell, with the broker’s price target increasing to $9.00 from $7.85.
For Sims Group the broker has lifted its FY08 earnings per share estimate 5% to $166.6, enough to lift its price target to $17.90 from $17.00. There is no change to its Sell rating as the share price remains well above its revised target.
Overall the FNArena database shows BlueScope rated as Buy twice, Hold five times and Sell/Reduce three times, with an average price target of $9.29. Sims Group is rated Buy three times, Accumulate and Reduce once each and Sell five times, with an average target of $20.98.
Shares in the two companies are stronger today despite a falling market, as at 3.15pm Bluescope was up 8c at $9.56 and Sims was 16c higher at $23.16.