US election provides surprise spark
2016. 12. 7 Steel/Nonferrous Metals (OVERWEIGHT) US election provides surprise spark ● The steel/nonferrous metal sector hit a bottom in 2015, rebounded in 2016 on supply controls and China’s real-estate market boom, and should rally in 2017 amid rising inflationary pressure thanks to likely infrastructure investments in the US. ● Absent fiscal expansion, growth of steel demand in China is highly likely to slow y-y due to a high base. Yet, there is upside if the nation implements its One Belt, One Road policy or accelerates restructuring. Meanwhile, US infrastructure plans, if carried out, should lead global demand for steel and copper to leap 1.6% and 1.8%, respectively, boding well for firms in the sector. ● The market in 1H17 should focus on whether the US president elect follows through on his promises and in 2H17 shift attention to potential demand hikes in China. We upgrade the sector to OVERWEIGHT as: 1) supply is unlikely to expand quickly as global miners scaled down capex over the past five years; 2) new demand related to US infrastructure investments should lead steel prices to rise; and 3) commodity prices should react sensitively to any sign of new demand. WHAT’S THE STORY? Summary: The steel/nonferrous metal sector faced difficulties in 2015 in terms of commodity prices, industry conditions and, on a company level, operating results. In 2016, however, numerous firms enjoyed an earnings rebound on a widening steel spread enabled by supply controls and subsequent price hikes. In 2017, we advise monitoring whether: 1) the US increases infrastructure spending, which should add inflationary pressure; 2) China expands fiscal spending and quickens restructuring; and 3) US Dollar Index (USDX) and London Metal Exchange Index (LMEX) both keep rising. US infrastructure plan to add inflationary pressure: Supply controls have driven up commodity prices in 2016; demand-driven inflation should take over in 2017. Donald Trump’s plans for infrastructure, if implemented, should lift global demand for steel and copper by a respective 1.6% and 1.8%, benefitting steelmakers (eg, via ASP hikes on rising raw-material cost). Posco’s ROE would rise to 0.7%pts y-y 4%. Meanwhile, rising prices of nonferrous metals should boost results of Korean players immediately. China’s upside to enter limelight in 2H17: We expect steel/metals firms to rally before their earnings start to improve on anticipation of US infrastructure spending. In 2H17, the market should start focusing on China, which represents 40-50% of global metal demand. Although demand growth may slow there next year (on the base of a real-estate boom and surging auto production), overall supply-demand dynamics should remain similar y-y amid gradual restructuring led by state-run firms. Upside could come from China implementing its One Belt, One Road policy or accelerating restructuring. USDX, LMEX to keep rising in near term: The USDX and LMEX have displayed a negative correlation since 2000, but both have risen of late on expectations of fiscal expansion and a US tilt toward protectionism. We expect them to keep rising in the near term amid uncertainty over Trump’s policies, boding well for Korean steel/metals firms. Upgrading to OVERWEIGHT: We upgrade the steel/nonferrous metal sector from NEUTRAL to OVERWEIGHT believing shares will rally on hopes that US infrastructure spending (and subsequent inflationary environment) impact earnings of steel/nonferrous metals companies immediately. The market in 1H17 should focus on whether US president elect Donald Trump follows through on his promises and in 2H17 on demand upside in China. Among large caps, we like Posco and Korea Zinc for their bright earnings outlooks thanks to solid spreads and rising commodity prices. Among small caps, we like Poongsan and Seah Steel for benefits resulting from infrastructure spending in the US. Jaeseung Baek Analyst jaeseung.baek@samsung.com 822 2020 7794 Sector Update AT A GLANCE Posco (005490 KS, KRW258,500) Target price: KRW340,000 (31.5%) Hyundai Steel (004020 KS, KRW53,100) Target price: KRW65,000 (22.4%) Korea Zinc (010130 KS, KRW507,000) Target price: KRW600,000 (18.3%) Poongsan (103140 KS, KRW43,450) Target price: KRW47,500 (9.3%) SeAH Steel (003030 KS, KRW94,500) Target price: KRW105,000 (11.1%) Seah Besteel (001430 KS, KRW26,450) Target price: KRW28,500 (7.8%) Steel/Nonferrous Metals 2016. 12. 7 2 Metals to shine again Upgrade sector to OVERWEIGHT Supply-demand dynamics are the main determinant of metal prices, noting commodity prices started trending down in 2010 due to a slowing global economy and serious supply glut. The steel/nonferrous metal sector in 2015 faced a difficult year in terms of commodity prices, industry conditions,
