Oz Steelmakers To Garner Support From Prices, Currency

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

-BlueScope gains anti-dumping traction
-What about loss of Oz car manufacturers?
-Tough going in US scrap for Sims
-Focus on de-leveraging for Arrium
 

By Eva Brocklehurst

JP Morgan describes 2013 as the year of self help for the steel sector. So, what's in line for 2014? This year is expected to be underpinned by an improving domestic residential market, declining Australian dollar and robust iron ore prices. Steel prices are also expected to be firmer this year.

The broker's take on BlueScope ((BSL)) is positive, given the macro background. JP Morgan thinks domestic revenue and earnings should benefit from better volumes and prices. The company is seen gaining traction from the anti-dumping campaign as well as de-leveraging from the joint venture with Nippon Steel. Prices will be supported by a softer Australian dollar. An Overweight recommendation is in place. JP Morgan has raised the price target to $5.90 and, in context with other ratings on the FNArena database, this is mid point in a range of $4.76 (CIMB Securities) to $6.47 (Deutsche Bank).

Macquarie maintains a $6.17 target and thinks the first half result on February 24 will be "eventful", given there are both negatives and positives associated with the stock. Positive aspects include better Australian margins from anti-dumping measures and a strong result in hot rolled product in North America. On the negative side there is a slowdown in Thailand related to the civil disturbance there and the implications from the closure of vehicle manufacturing in this country by Ford, Holden and now Toyota. Macquarie hopes for some information from BlueScope on the potential impact for steel now that Toyota, the last remaining, has announced plans to quit Australia by 2017. The broker calculates that domestic volumes account for around 8.5% of steel supplied from BlueScope's CIPA division to the vehicle and transport sector. Macquarie retains an Outperform rating. In total there are six Buy ratings on the FNArena database with just one Hold – CIMB.

Recycler, Sims Metal Management ((SGM)), is likely to experience continuing tough trading conditions in the US, although Macquarie is hopeful of some improvement in Australasia. This optimism stems from reduced competition from Arrium ((ARI)), which has rationalised a number of sites in 2013, as well as from a weaker Australian dollar. The broker is also intent on scrutinising the first half results, due February 14, for the working capital/debt balance. The company reported mixed conditions at the AGM and Macquarie notes restructuring in the UK metals division delivered improvements but Sims did not believe higher scrap prices would help ferrous margins in North America because of the intense competition there for unprocessed raw materials. Sims has the Underperform rating in Macquarie's steel stable, with a $9.69 target. This compares with a target range of $9.91 (CIMB) to $12.84 (Deutsche Bank) on the FNArena database.

JP Morgan observes, while the US macro environment is moving favourably, there is no clear evidence that a margin recovery is underway. The sourcing of intake scrap remains challenging and this broker also thinks the near-term situation in North America will remain difficult. Still, this looks to be factored into the share price, in the broker's opinion, and longer term fundamentals remain positive. JP Morgan is Overweight Sims with a $11.70 price target. The stock has four Buy ratings, two Hold and two Sell on the FNArena database.

The third player in Australia's steel market, Arrium will publish the first half results on February 18. JP Morgan suspects the combination of falling iron ore prices and high financial leverage led to the severe contraction in the share price in 2013. As iron prices recover, and hold at reasonable levels, the broker notes the share price shows a corresponding improvement. The focus at the results is on de-leveraging, with a target of $200-250m in divestments. The broker thinks increased cash flow from mining and cost savings from manufacturing should deliver enough cash to pay down more than $400m in debt in 2014. JP Morgan retains a Neutral rating on valuation, sharing that level with Deutsche Bank, which has a Hold rating on the FNArena database. Macquarie stands out with a sole Outperform rating.

Macquarie expects mining drove an improved bottom line in the first half for Arrium and this will remain the short-term driver of earnings sentiment and the balance sheet position. In terms of steel, Macquarie acknowledges there's unlikely to be any substantial improvement in earnings in the first half and, while Arrium is pursuing anti-dumping claims on hot rolled structural steel, there have not been any findings, officially, in the company's favour. Arrium has also indicated the scrap environment is difficult but expects some benefit from rationalisation and cost reductions in Australia and Asia. There are five Sell ratings for Arrium on the FNArena database.

One of these, BA-Merrill Lynch, recently downgraded Arrium to Underperform from Neutral, citing an overvalued share price. Merrills suspects the run up in the price has been too steep. Nevertheless, the broker thinks the stock will be supported by iron ore prices, better lump premiums as well as the foreign exchange outlook. Merrills did lift the target to $1.40, expecting earnings will improve substantially in FY14 and that should allow for a faster reduction in debt. Merrill's target price is within a range of 92c (Citi) to $1.98 (Macquarie) on the database.

 

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