Regional Industry Flash Note Basic Materials · resume production at higher iron prices. Our...

ed: CK / sa: JC

CRB Index : 666.98

Analyst LEE Eun Young +65 6682 3708 [email protected] Addison DAI +852 2971 1931 [email protected]

STOCKS

Source: Bloomberg Finance L.P, DBS Bank, DBS Vickers

Steel mills’ profitability

‐80

‐60

‐40

‐20

0

20

40

60

80

0

100

200

300

400

500

600

700

800

12/2009 3/2011 6/2012 9/2013 12/2014 3/2016

(US$/ton)(US$/ton)

Steel mill's profit(R)

HRC prices

Raw material cost of BOF

Source: Platts, Metal Bulletin, DBS Bank

DBS Group Research . Equity 18 Apr 2016

Regional Industry Flash Note

Basic Materials Refer to important disclosures at the end of this report

Price rally to stretch a bit more before losing steam

Stronger-than-expected steel price rally to persist on improving confidence

Expect sector earnings improvement till 2Q16

Prices are likely to weaken at the end of 2Q16 due to production growth

Recommend the switch to laggards

Growing confidence in the market. In our report on 1 Feb, we had suggested taking advantage of trading opportunities for steel players as we expect steel prices to rebound due to i) restocking demand, and ii) steel mills’ efforts to increase prices, as the depressed prices (below cash cost) translated into huge losses. The steel price rally has been stronger than expected, with iron ore price rising 33% (US$13/ton) and Chinese HRC export price gaining 33% (US$100/ton) since Feb. Particularly, property prices rebounding in the major cities and the PRC government’s announcement of more concrete restructuring plans involving raising funds for the laid-off workers and steel-capacity shutdown have instilled more market confidence. Declining Chinese global steel exports have underpinned regional steel price hikes. Despite the sideway movements of iron ore prices recently, steel prices in China continued to rise in Apr, and we expect the rally to continue. This implies steel stocks could outperform further in the near term.

Swinging from loss-making to profitability in 2Q16. Following the recent steel price recovery, Chinese steel mills based on BOF would register profits since March vs. the persistent losses in 2015. We expect the earnings of steel mills to improve until 2Q16, considering the time gap between contract and delivery. The imported Chinese HRC to Korea is offered at US$400/ton, rising from US$280/ton in the beginning of 2016. Angang and Bao Steel raised product prices for May recently for the second consecutive month, and POSCO raised its HRC domestic prices to middlemen by c.KRW70k/ton or US$60/ton over the last two months and this is expected to rise further for May shipments.

Prices to weaken on output resumption in June-July. We do not expect the current steel price rally to be sustainable in the longer term given that i) the steel mills in China and CIS countries will resume production, ii) there is a lack of tangible demand growth in the downstream industry, except for restocking demand in anticipation of the peak season for construction, and iii) the iron ore price uptrend will not be sustainable as Roy Hill (an Australian miner) will ramp up its output to 55m tons p.a. by end-2016 and idled Chinese mines would resume production at higher iron prices.

Our recommendation: Switch to laggards. The top outperformers in the sector YTD were POSCO and Angang, as their businesses have a larger exposure to the spot market than peers. Such players are considered the key beneficiaries of a steel price rebound in the short term. We recommend investors to switch from the outperformers to laggards such as Bao Steel in China and Hyundai Steel/SeAh Besteel in Korea which have stable end-user customers – the automobile sector in the respective countries.

Price Mkt Cap Target Price Performance (%)

KRW US$m KRW 3 mth 12 mth Rating

POSCO 246,500 18,742 190,000 52.6 (3.7) HOLD Hyundai Steel 61,000 7,099 73,000 34.4 (20.3) BUY Seah Besteel 29,750 930 41,000 17.4 (14.6) BUY Baoshan Iron & Steel 5.82 14,795 7.14 (0.7) (20.5) BUY Angang Steel 4.09 3,816 3.33 27.4 (33.2) HOLD Maanshan Iron & Steel

1.81 1,797 1.20 18.3 (39.9) FULLY VALUED

Industry Flash Note

Basic Materials

Price outlook: Stronger-than-expected steel price rally to extend further

Steel prices have stayed too low and long below production cost

The HRC benchmark prices for exports in 2015 have been declining continuously all year round to US$240/ton in Dec from US$364/ton in Jan. During the same period, the domestic Chinese HRC prices have fallen from US$383/ton to US$265/ton. Furthermore, iron ore prices (fine, 62% Fe, Australia, CNF China) have declined to US$40/ton from US$63/ton, and Chinese coke prices have declined to US$135/ton from US$175/ton in the same period. As a result, production cost per ton of steel declined by US$69/ton, while the HRC prices in China plummeted by US$93/ton. Most of the steel players in China have been registering losses since 2H15.

Stronger-than-expected steel price increase. Steel prices have bottomed out in Jan and registered strong growth in Mar. The domestic HRC prices in China increased 20% in Mar and rose further in Apr to RMB2,620/ton, despite iron ore prices hovering in a tight range of around US$50/ton. Also the spot rebar prices in China jumped to a 16-month high of c.US$400/ton last week, but traders were in no rush to liquidate their stocks in light of the tight supply for certain specifications caused by low market stocks and slow deliveries from mills. China steel exports in Jan-Feb edged down 1.3%, which underpinned the buoyancy of regional steel prices – of note, HRC benchmark prices for the export market had increased to US$400/ton.

Steel price uptrend to continue. On 11 Apr, Angang raised its selling prices for flat rolled products in May by RMB100-360/ton (U$16-55/ton). It the first among the large SOE mills to make such a move. After the price increase, Angang’s May ex-works price for HRC will be at 2,750/ton (US$425/ton) – up by RMB300/ton

(US$46/ton). Also, the prices of CR coil (SPCC1mm) and hot galvanised coil increased to RMB3,555/ton (US$549/ton) and RMB4,000/ton (US$617/ton) excluding 17% VAT respectively.

Bao Steel announced flat steel price hikes for the second straight month in May by RMB150-300/ton (US$23-46/ton) on 12 Apr. It will raise its HRC prices by RMB150/ton (US$23/ton) for May after the RMB200/ton increase in Apr.

There is market expectations the HRC prices will increase to US$480/ton. We expect the steel price rally to continue till the end of 2Q16, backed by the low inventory in the market and improving market sentiment.

Iron ore prices regaining momentum. Iron prices are likely to rise further in the short term given i) the recent strengthening of steel prices that is backed by improved market psychology, and ii) more mills are preparing to restart idled capacity, especially in China. This would be supportive of steel prices in near term, but the subsequent supply growth could lead to a price trend reversal.

Steel and iron ore price strength to lose steam in the summer. We expect the steel price rally to lose steam at the end of 2Q16, as i) the restocking process for middlemen and clients would end, ii) supply growth is expected from the restart of idled plants in China and CIS countries, and iii) the demand fundamentals are not likely to improve this year. Of note, WSA has revised down its global steel consumption growth for 2016 from 0.7% to -0.8% on 13 Apr.

Industry Flash Note

Basic Materials

Price forecasts of iron ore and coking coal HRC

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90

100

110

120

30

35

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45

50

55

60

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Jan‐15 Apr‐15 Jul‐15 Oct‐15 Jan‐16 Apr‐16 Jul‐16 Oct‐16 Jan‐17

(US$/ton)China spot iron ore prices

Asia contract coking coal prices

250

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350

400

450

500

550

Jan‐15 Apr‐15 Jul‐15 Oct‐15 Jan‐16 Apr‐16 Jul‐16 Oct‐16 Jan‐17

(US$/ton)

HRC Benchmark prices

Source: Platts, DBS Bank Source: Platts, DBS Bank

Price forecasts (US$/ton) China import I ron Ore

Fines 62% Fe spot Hard coking

coal pricesMB benchmark

pricesChina export

prices

2012 128 209 598 599

2013 135 151 566 524

2014 97 126 544 453

2015 56 103 373 321

2016F 49 95 356 340

2017F 54 100 350 350

% Chg y-o-2013 5.3 (27.9) (5.3) (12.5)2014 (28.4) (16.7) (4.0) (13.5)2015 (42.5) (18.0) (31.5) (29.1)2016F (12.5) (7.7) (4.4) 5.9 2017F 10.8 5.3 (1.8) 2.9 Source: Platts, Bloomberg Finance L.P, DBS Bank

PRC government policy reform: Restructuring policy is shaping with more concrete measures

In Jan 2015, the PRC government announced the official statement on the steel and coal industry restructuring Chinese cabinet meeting. China will cut another 100-150m tons of crude steel production based on the elimination of 90m ton of capacity over next three years.

In Feb, Chinese authorities said they expect to cut 1.8m jobs in the country's steel and coal industry. Human resources and social security minister Yin Weimin told that the cuts will affect 1.3m coal jobs, while 500,000 steel workers face redundancy.

In Mar, at the 2016 NPC meeting, Premier Li pledged that the PRC government will arrange a Rmb100bn subsidy to deal with staff lay-offs. According to an industry expert, RMB100k is required to compensate one laid-off employee. This allows one to estimate the total costs for laying off 1m employees.

On 11 Apr, the local media reported that China's Ministry of Industry is expected to unveil the next revision of its steel industry restructuring plan in June. The plan will seek to guide the industry towards consolidation as one of its ten goals, said Luo Tiejun, Deputy Director of the Ministry's Department of Raw Materials at an April 9 meeting in Beijing. According to him, China would reduce annual steel capacity by another 200m tpa to about 1.1bn tpa by 2020, while domestic consumption was unlikely to exceed 700m ton. Of note, current Chinese steel capacity is over 1.25bn tpa with production of only 804m tons in 2015, implying a utilisation rate of only 64%. China aims to build 10 globally competitive steel giants through merger and restructuring, forming 1-2 steel giants with capacity >100m tpa, 3-5 with capacity >50m tpa and 6-8 with capacity >30m tpa. In terms of concentration, it targets to increase the contribution of the top 10 largest steel producers to total output to 60% in 2025 from 34.2%in 2015.

Industry Flash Note

Basic Materials

No immediate real impact of supply-side reforms. Despite the recent positive development of the Chinese restructuring plan, the capacity cut might not be effective any time soon given that no timeframe has been specified. The key lies in execution, i.e. how the central government will subsidise the resultant staff lay-offs (we think the above-mentioned special fund is far from sufficient) and the impact on financials such as substantial impairment of bad debts upon steel asset write-downs. We estimate that China had shut down obsolete capacity of around 100mt in the past five years, but this did not revive the industry given the inherent excess capacity issues. In the following three years, it is uncertain if the effected supply cut could offset the slowdown in demand.

Global steel demand

Revised down demand forecasts .The World Steel Association (WSA) has cut its forecast for 2016 global steel consumption to -0.8% y o y from 0.7%. The finished steel consumption this year is likely to reach 1,488m metric tons, a fall of 0.8% from 2015, on top of last year’s 3% drop from 2014. The key reason for the bearish forecast is because of -4% growth in Chinese consumption. While, the global steel consumption ex.

China is expected to register 1.8% growth, backed by 1.7% growth in developed economy and 1.8% growth in the emerging and developing countries excluding China. Growth will come back in 2017, attributable to ex. China’s. WSA forecast that global steel demand will edge up by 0.4% to 1,494 m tons in 2017, as global consumption ex. China would grow 3% mainly driven by Europe, NAFTA and MENA. Particularly, MENA’s (Middle East and North Africa) demand growth is expected to accelerate to 4.8% in 2017 from 3.2% in 2016. However, WSA expects China’s steel demand to decline further by 3% in 2017.

India has strongest growth. Among the top 10 biggest steel consumption countries, India has been registering the strongest demand growth since 2015. During 2016-2017, the country is expected to register a 5.4% annual demand growth. We believe that the steel demand outlook in India is promising, as the country is now at the stage of high steel demand elasticity to GDP and is constructing national infrastructure on a massive scale.

Global steel demand forecasts million tonnes , y-o-y growth rates, %

2015 2016 (f) 2017 (f) 2015 2016 (f) 2017 (f)153.3 155.4 158.1 2.8 1.4 1.7

40.1 41.3 42.6 8.1 3.0 3.150.0 46.3 48.4 -10.8 -7.4 4.5

134.5 138.8 142.3 -8.4 3.2 2.545.4 42.6 44.0 -7.3 -6.2 3.339.0 40.5 43.1 4.3 3.8 6.453.0 54.3 56.4 -1.0 2.5 3.9

984.8 968.5 958.7 -3.3 -1.7 -1.01500.1 1487.7 1493.6 -3.0 -0.8 0.4

399.1 405.9 410.4 -4.0 1.7 1.11101.1 1081.8 1083.2 -2.7 -1.8 0.1672.3 645.4 626.1 -5.4 -4.0 -3.072.1 74.4 78.0 -0.6 3.2 4.8

428.6 436.3 457.1 2.0 1.8 4.8827.7 842.2 867.6 -1.0 1.8 3.0

Emerging and Developing EconomiesChinaMENAEm. and Dev. Economies excl. ChinaWorld excl. China

Developed Economies

RegionsEuropean Union (28)

Other EuropeCISNAFTACentral and South AmericaAfricaMiddle EastAsia and OceaniaWorld

Source: WSA, DBS Bank

Industry Flash Note

Basic Materials

Top 10 Steel-consuming countries 2015 2016 (f) 2017 (f) 2015 2016 (f) 2017 (f)

672.3 645.4 626.1 -5.4 -4.0 -3.0

95.7 98.8 101.5 -10.6 3.2 2.7

79.5 83.8 88.3 4.5 5.4 5.4

62.9 64.4 63.6 -7.0 2.4 -1.2

56.0 56.3 56.4 0.9 0.5 0.2

39.4 35.9 37.4 -8.4 -8.9 4.2

39.0 40.5 39.9 -1.5 3.8 -1.5

34.4 35.5 36.7 11.7 3.2 3.4

24.2 25.0 26.2 5.8 3.3 4.8

21.3 19.4 20.1 -16.7 -8.9 3.6

South Korea

Russia

Germany

Turkey

Brazil

Mexico

Japan

million t onnes, y-o-y growth rates, %China

United States

India

Source: WSA, DBS Bank

China Steel consumption outlook

Negative growth of steel demand in 2016 According to CISA, the consumption of crude steel is expected to decline by 4-5% in 2016. However, the WSA forecast this to drop by only 2%. We expect Chinese crude steel consumption to decline by 1% this year. Steel consumption in the manufacturing industries to be stagnant. In the automobile sector, steel consumption in 2015 is expected to have edged up 1.3% as passenger vehicles growth (+3.1%) more than offset commercial vehicle weakness (-9.9%). In home appliance, steel orders were in general flattish y-o-y as the consumption of the three major home appliances of washing machine, refrigerator and aircon is saturated. In 2015, the production of machinery has declined and the downtrend will continue in 2016, driven by the sluggish shipbuilding sector.

Construction a key sector for steel demand growth. The construction sector accounts for c.55% of total steel consumption. Our China property team thinks that construction activities in China are not likely to speed up in 2016. Most developers are in the midst of destocking and are thus conservative on sales growth and land acquisitions. So, it might take some time for inventory to run down before developers become confident about speeding up the launch of new projects again. Hence, for the housing sector in 2015, we estimate that steel consumption dropped 13%, as the ground floor area new starts of residential and commercial buildings declined by 14.0% and 10.5% respectively. For infrastructure, we estimate that steel consumption increased 3.9% in 2015, as road investments increased 6.5% which offset the 0.9% decline in railway investments.

Industry Flash Note

Basic Materials

China: Steel consumption by segment

Tonnes (m)

YoYchg

(%)Share(%)

Tonnes (m)

YoYchg

(%)Share(%)

Tonnes (m)

YoYchg

(%)Share(%)

Tonnes (m)

YoYchg

(%)Share(%)

Const ruct ion 421 6% 57% 412 -2% 57% 382 -7.2% 55% 372 -2.5% 53%

Commercial &other (non-residential)

83 3% 11% 81 -3% 11% 72 -10.5% 10% 65 -10.0% 9%

Residential 215 3% 30% 192 -11% 26% 165 -14.0% 24% 157 -5.0% 22% Infrastructure 123 3% 17% 140 14% 17% 145 3.9% 21% 151 4.0% 22%Machinery 112 4% 17% 117 5% 16% 117 0.0% 17% 116 -1.0% 17%Automobile 57 13% 7% 60 5% 8% 61 1.3% 9% 61 1.3% 9%Home Appliance 11 10% 2% 12 7% 2% 12 0.0% 2% 12 0.0% 2%Container 2 -5% 0% 2 2% 0% 2 0.0% 0% 2 0.0% 0%Shipbuilding 21 -10% 3% 22 5% 3% 22 0.0% 3% 22 0.0% 3%Railway 6 5% 1% 6 8% 1% 6 -1.0% 1% 6 0.0% 1%Pipeline 9 5% 1% 9 10% 1% 9 0.0% 1% 9 0.0% 1%Elec. power 25 10% 3% 28 15% 4% 32 12.6% 5% 35 10.0% 5%Others 57 0% 8% 57 0% 8% 57 0.0% 8% 57 0.0% 8%Total 718 5% 100% 725 0.9% 100% 699 -3.5% 100% 693 -1.0% 100%

2013 2014 2015E 2016F

Source: China Iron & Steel Association, CRU, DBS Vickers

Restocking demand for iron ore and steel

Continuous destocking in 2015. The inventories of iron ore and steel products have been destocked due to continuous price declines for the whole of 2015. Particularly, the inventories of middlemen has dropped below the reasonable levels, as the future expectations had worsened and holding inventory also led to additional costs – no thanks to potential losses arising from inventory write-downs. This is the key reason for the strong rebound of steel prices when the market psychology improved.

Lean steel inventory of producers. Large and medium Chinese steel mills have been fine-tuning their finished steel inventories since early-2015, resulting in a decline to 9.4 days in Jan 16 and 9.6 days in Dec 15 versus 12.4 days in Feb 15. Meanwhile, steel traders are also taking a prudent stance towards their replenishment activities. This pointed to a stronger-than-expected restocking after Chinese New Year holidays.

Iron ore and steel inventories in China Long and flat steel inventories of middlemen

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120

06.7 07.7 08.7 09.7 10.7 11.7 12.7 13.7 14.7 15.7

(m ton)(m ton)Iron ore inventory(L)

Steel inventories in the middleman of major cities(R)

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(m ton) Long steel products inventory

Flat steel products inventory

Source: Bloomberg Finance L.P, DBS Vickers

Industry Flash Note

Basic Materials

China: Steel inventory at large and medium mills

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14.0

0

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20,000

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60,000

Jan-

11M

ar-1

1M

a y-1

1Ju

l-11

Sep-

11N

ov-1

1Ja

n-12

Mar

-12

Ma y

-12

Jul-1

2Se

p-12

Nov

-12

Jan-

13M

ar-1

3M

a y-1

3Ju

l-13

Sep-

13N

ov-1

3Ja

n-14

Mar

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Ma y

-14

Jul-1

4Se

p-14

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a y-1

5Ju

l-15

Sep-

15N

ov-1

5

(days)

Medium-to-large sized steel output (LHS) Steel inventory at medium-to-large sized steel mills (RHS)

(thousand tonne)

Source: China Iron & Steel Association, DBS Vickers

Resumption of production in the near future

Steel production cuts during end-2015 and early-2016 seem short-lived. In response to tightening credit during the year-end and cash losses from steel making, China cut its steel capacity by 70mt in Dec 15 versus the industry’s output of 804mt in FY15. This resulted in the 10-daily average crude steel output

of large and medium steel mills declining to 1.51mt in mid-Jan versus 1.57mt in mid-Dec-15. Nevertheless, we see the figure rebounding to 1.66mt in light of the spot steel price recovery by Rmb500/t (excl. VAT) since end-Dec 15. We understand the local government have also supported to the production resumption.

China steel: 10-day daily output

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-5.0%

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5.0%

10.0%

0

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100

150

200

Oct

-14

Nov

-14

Dec

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Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

10-day daily average crude steel output of China's large & medium steel enterprises (ten thousand tonne) (LHS)10-day daily average vs previous 10-day daily average (RHS)

Source: CEIC, DBS Bank, DBS Vickers

Industry Flash Note

Basic Materials

Total 39 blast furnaces to resume production by end-April. According to an industry research firm in China, Mysteel, the steel mills in China are preparing to jumpstart their idled plants soon. 15 blast furnaces in China have resumed operations over Jan-Feb, and 24 blast furnaces are projected to restart operations from March to April. The total production volume increase from the resumption of production for these plants is estimated at 85,000 ton per day or 2.6m tons per month. Higher prices to entice more plants to restart production. The recent surge in steel prices offers strong incentives for increasing and restarting output. Of note, steel mills in CIS (Russia/Ukraine) have announced plans to restart their crude steel capacity. Furthermore, existing steel mills are likely to increase their production volume to reduce its fixed cost. In

fact, Bao Steel Group’s Zhanjiang Steel is expected to increase its production volume by 5m in 2016. It kicked off production for its #1 new blast furnace on Sep 2016 and will complete the construction of its US$2bn blast furnace this year. Global steel production to decline in 2016. We expect the global steel production volume to drop, no thanks to weak demand and rising protectionism in the steel net importing countries – as a case in point, China is expected to cut its production volume by 3.5% in 2016, However, there is the risk that production will increase whenever steel demand recovers to a point that buoys prices to profitable levels again.

Global : Steel production outlook (m tonnes) 2012 2013 2014 2015 2016F 2015 2016F

Asia 989.1 1,079.1 1,108.4 1,086.3 1,068.5 -2.0% -1.6%

China 715.0 799.0 819.9 800.5 775.0 -2.4% -3.2%

Other Asia 274.1 280.1 288.5 285.7 293.5 -1.0% 2.7%

-India 77.2 81.2 83.7 89.6 93.5 7.1% 4.4%

-Japan 107.2 110.6 110.7 105.1 103.5 -5.0% -1.6%

-South Korea 69.2 66.0 71.1 69.6 70.0 -2.0% 0.5%

Europe 209.0 203.5 206.5 201.5 201.5 -2.4% 0.0%

EU28 169.9 165.7 168.9 165.9 165.4 -1.8% -0.3%

Other Europe 39.1 37.8 37.6 35.5 36.1 -5.4% 1.6%

CIS 111.1 108.6 105.2 101.3 103.5 -3.7% 2.1%

NAFTA 120.3 117.8 119.8 109.5 114.0 -8.6% 4.1%

-USA 86.4 88.7 87.0 78.8 82.2 -9.3% 4.3%

C & S America 48.3 47.3 46.4 44.8 45.0 -3.5% 0.5%

Middle East 22.0 25.9 28.1 26.9 28.2 -4.1% 4.6%

Africa 15.1 15.8 15.0 14.5 14.6 -3.6% 0.5%

Aust ra lasia 5.8 5.5 5.5 5.8 5.9 6.2% 0.9%

Global t ot a l 1,520.7 1,603.6 1,634.8 1,590.6 1,581.0 -2.7% -0.6% Source: WSA, Platts, DBS Bank

Industry Flash Note

Basic Materials

Earnings recovery ahead Earnings recovery up until 2Q16. Following the recent steel price recovery, Chinese steel mills based on BOF would register profits since March vs. the persistent losses in 2015. We expect the earnings of steel mills to improve until 2Q16, considering time gap between contract and delivery. The imported Chinese HRC to Korea is offered at US$400/ton, rising from US$280/ton in the beginning of 2016. Angang and Bao Steel raised product prices for May recently for the second

consecutive month, and POSCO raised its HRC domestic prices to middlemen by c.KRW70k/ton or US$60/ton for the last two months and this is expected to rise further for May shipments. The higher market prices for iron and steel products will be reflected in the ASP of steel mills from April onwards. The current iron ore price range of about US$50-60/ton also implies significant margin expansion for steel mills.

Steel mill’s profitability

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0

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40

60

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0

100

200

300

400

500

600

700

800

12/2009

3/2010

6/2010

9/2010

12/2010

3/2011

6/2011

9/2011

12/2011

3/2012

6/2012

9/2012

12/2012

3/2013

6/2013

9/2013

12/2013

3/2014

6/2014

9/2014

12/2014

3/2015

6/2015

9/2015

12/2015

3/2016

(US$/ton)(US$/ton)

Steel mill's profit

HRC prices

Raw material cost of BOF

Source: Platts, Bloomberg Finance L.P., DBS Bank

Industry Flash Note

Basic Materials

Stock performance: Outperformance of steel share prices triggered by steel price hike

Share price performance: Arcelor Mittal is the best performer among regional peers for the last three months followed by POSCO. Their share prices have plummeted to 0.2x P/BV and 0.3x P/BV respectively on the slump of steel prices.

Korea POSCO HYUNDAI STEEL CO

SEAH BESTEEL

CORP KOREA ZINC CO LTD

POONGSAN CORP

NIPPON STEEL CORP

JFE HOLDINGS

INC

TOKYO STEEL MFG

CO LTD 1wk % 6.0 8.3 2.4 5.4 2.5 15.1 14.1 6.2 1month % 17.4 10.7 10.2 3.0 7.7 6.3 7.6 (3.7) 3month % 52.6 34.4 17.4 13.5 24.6 11.0 3.7 (3.7) ytd % 48.0 22.1 7.8 6.5 12.0 (1.4) (9.3) (9.8) 1 year % (3.7) (20.3) (14.6) 12.1 20.0 (22.1) (36.7) (17.9)

HK/China /Others BAOSHAN

IRON & STEEL CO-A

ANGANG STEEL CO

LTD-H

MAANSHAN IRON &

STEEL-H

UNITED STATES

STEEL CORP NUCOR

CORP

ARCELORMITTAL-NY

REGISTERED TATA STEEL

LIMITED

CHINA STEEL CORP

1wk % 5.8 4.3 3.4 17.9 5.9 28.3 1.3 23 1month % 12.3 14.9 19.9 32.1 9.5 41.2 10.8 7.1 3month % (0.5) 27.4 18.3 173.9 40.3 123.0 44.9 3.7 ytd % 4.5 30.3 9.0 136.5 22.4 79.1 28.1 30.1 1 year % (20.4) (33.2) (39.9) (31.0) 1.6 (25.8) (1.4) 26.5

Based on share prices as of 15 Apr. Source: Platts, Bloomberg Finance L.P., DBS Bank

Share price: Korea zinc vs. Poongsan Share price: US Rusal vs. China Hongqiao

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(U$)

US Steel Nucor

1517192123252729313335

100

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600

700

800

09.1 10.1 11.1 12.1 13.1 14.1 15.1 16.1

(TWD)(IDR)

Tata Steel China Steel

Share price: Korea zinc vs. Poongsan Share price: Korea zinc vs. Poongsan

0

20

40

60

80

100

120

140

160

0

100

200

300

400

500

600

700

11.1 11.7 12.1 12.7 13.1 13.7 14.1 14.7 15.1 15.7 16.1

(k KRW)(k KRW)POSCO(L)

Hyundai Steel(R)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1012141618202224262830

11.1 11.7 12.1 12.7 13.1 13.7 14.1 14.7 15.1 15.7 16.1

(HK$)(k RMB)

BaoSteel(L) Angang(R)

Source: Bloomberg Finance L.P., DBS Bank

Industry Flash Note

Basic Materials

Sector valuation: Following the recent share price increase, P/BV multiple has risen to 0.6x for Korea and 1.3x for HK from 0.42x and 1x respectively at the end of 2015.

P/BV: HSI vs KOSPI Metal & Mining Index ROE: HSI vs KOSPI Metal & Mining sector

3.4

1.31.0

1.31.5

0.8 0.8

1.3

1.7

1.31.4

1.21.0 1.1 1.0

1.21.5

0.7 0.6 0.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

07 08 09 10 11 12 13 14 15 16F

(x)

HK

Korea

Source: IBES, DBS Bank

6.3

14.5

7.1

14.2

24.4

10.8

4.0

11.9

16.3

13.3

16.6 15.1

9.5

12.112.6

8.66.4

4.43.0 2.3

0

5

10

15

20

25

30

07 08 09 10 11 12 13 14 15 16F

(%)

HK

Korea

Source: IBES, DBS Bank

Trailing P/BV: HSI Metal & Mining index Trailing P/BV: KOSPI Basic Metal Index

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

HONG KONG-DS Ind. Met & Mines - PRICE/BOOK

Avg

-1sd

+2sd

+1sd


0.0

0.5

1.0

1.5

2.0

2.5

2007 2009 2011 2013 2015

KOREA-DS Ind. Met & Mines - PRICE/BOOK RATIO

Avg

-1sd

-2sd

+1sd

+2sd


Trailing P/E: HSI Metal & Mining index Trailing P/E: KOSPI Basic Metal Index

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

HONG KONG -DS Ind. Met & Mines - (PE)

Avg

+1sd

+2sd


-5.0

0.0

5.0

10.0

15.0

20.0

25.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

KOREA-DS Ind. Met & Mines - (PE)

Avg

-1sd

+1sd

+2sd


Industry Flash Note

Basic Materials

Global Peers: Valuation comparison - Steel players’ ROEs are projected to be lower than 5%, hence they are trading at 0.5x P/BV multiple. Meanwhile, some non-ferrous metal players including Korea Zinc and US Rusal are expected to register higher ROEs, hence the premiums on their valuations would be justified.

MarketCap(US$) PER PBR EV/EBITDA ROE

FY16F FY17F FY16F FY17F FY16F FY17F FY16F FY17F

Korea listed players

Posco 18,717 17.1 13.4 0.5 0.5 6.8 6.5 3.1 3.8

Korea Zinc 8,217 15.0 13.4 1.7 1.5 7.7 7.1 11.9 12.1

Hyundai Steel 7,119 9.4 8.4 0.5 0.5 6.5 6.3 5.5 5.9

Seah Besteel 955 9.2 9.4 0.7 0.7 6.7 6.6 7.2 6.9

Poongsan 747 10.7 9.1 0.7 0.7 8.6 8.1 7.2 7.9

HK-listed players

Aluminum Corp of China 9,253 N/A N/A 1.0 1.0 20.5 15.1 (5.4) (0.6)

United Co.Rusal 5,250 7.9 6.9 4.0 2.6 9.4 9.0 30.8 20.9

Jiangxi Copper 6,672 24.4 18.8 0.6 0.6 15.2 13.6 2.6 3.2

Zinjin Mining 10,152 22.0 16.8 1.3 1.3 13.6 11.3 6.6 7.9

Angang Steel 5,006 N/A N/A 0.6 0.6 11.2 9.4 -1.419 0.016

Maanshan Steel 3,165 N/A N/A 0.7 0.7 15.8 12.4 (11.2) (8.5)

China A-share listed players

Baosteel-A 15,019 26.8 19.9 0.8 0.8 8.4 7.3 3.3 4.3

Wuhan Iron & Steel-A 5,670 N/A N/A 1.1 1.2 214.1 24.7 -19.262 -2.168

Hebei Iron & Steel-A 5,506 65.3 46.9 0.8 0.8 15.5 14.9 1.0 1.4

Angang-A 5,006 N/A 1510.0 0.8 0.7 11.2 9.3 (0.6) 0.6

Maanshan Steel-A 3,165 N/A N/A 1.3 1.3 16.1 12.6 (8.0) (6.1)

Asian listed steel players:

China Steel Corp. 10,866 58.2 30.7 1.2 1.2 14.3 12.5 2.253 3.997

Tata Steel 9,424 31.1 14.1 0.5 0.5 8.8 7.6 1.5 3.7

Steel authority of India 13,041 20.5 13.7 3.2 2.7 6.3 5.6 15.5 19.7

JSW Steel 4,773 495.3 17.5 1.5 1.4 11.2 7.0 n.a. n.a.

JFE 9,424 31.1 14.1 0.5 0.5 8.8 7.6 1.5 3.7

Nippon Steel 15,672 26.4 17.9 2.1 1.9 9.7 7.8 8.3 12.1

Nisshin Steel 7,119 9.4 8.3 0.5 0.5 6.5 6.3 5.5 5.9

Kobe Steel 3,937 N/A 14.4 0.6 0.6 7.0 6.0 (2.4) 3.8

Source: Bloomberg Finance L.P, DBS Bank

Industry Flash Note

Basic Materials

Major Prices: Spot Iron ore prices have risen to US$60/ton (Fe content 62%). However, it is not sustainable at this level as higher operating costs from new mines are expected. Following iron ore's price rebound, benchmark steel prices are also rebounding and the margins are improving.

Spread between China HRC prices and spot iron ore prices Spread between Benchmark HRC prices and contract basis iron ore prices

100

150

200

250

300

350

400

450

500

550

600

0

50

100

150

200

250

12.11 13.3 13.7 13.11 14.3 14.7 14.11 15.3 15.7 15.11 16.3

(US$/ton)(US$/ton)Spread

China import Iron Ore Fines 62% Fe spot

HRC benchmark prices

0

50

100

150

200

250

300

350

400

450

0

100

200

300

400

500

600

700

800

1Q10 1Q11 1Q12 1Q13 1Q14 1Q15

(US$/ton)(US$/ton) Spread

Bench mark HRC prices

Input cost of iron ore and coking coal per ton of steel


Spot iron ore prices China: Coke prices

0

50

100

150

200

250

09.01 10.01 11.01 12.01 13.01 14.01 15.01 16.01

(U$/ton)China import Iron Ore Fines 62% Fe spot (CFR Tianjin port) USD/dry metric tonne

Iron Ores Fines 63.5% Fe Offshore Export Price India to China CIF

0

50

100

150

200

250

300

350

400

0

100

200

300

400

500

600

10.01 11.01 12.01 13.01 14.01 15.01 16.01

(US$/ton)(RMB/ton)China Foundry Coke Domestic Spot Price Shanghai

Coking Coal Queensland Index CCQ - Delayed


Industry Flash Note

Basic Materials

Most prices in the sector, from upstream and downstream, have rebounded.

Steel scrap prices HRC prices by region

0

100

200

300

400

500

600

11.03 12.03 13.03 14.03 15.03 16.03

(US$/ton) US domestic Shredded Obsolete Scrap (Delivered Midwest mill) per long ton

Turkey import Heavy Melt Scrap #1&2 80:20 (CFR Turkish port) per metric tonne

200

400

600

800

1,000

1,200

1,400

07.3 08.3 09.3 10.3 11.3 12.3 13.3 14.3 15.3 16.3

(US$/ton) Hot rolled coil, World Export Market

USA East of Miss Hot rolled coil

Mainland China Hot rolled coil

US: HRC & CRC prices CIS Export prices

0

200

400

600

800

1,000

1,200

1,400

07.01 08.01 09.01 10.01 11.01 12.01 13.01 14.01 15.01 16.01

(U$/ton) USA East of Miss Hot rolled coil

USA East of Miss Cold rolled coil

‐

200

400

600

800

1,000

1,200

07.3 08.3 09.3 10.3 11.3 12.3 13.3 14.3 15.3 16.3

(US$/ton)

Steel CIS Export HR coil $ per tonne Black Sea/Baltic Sea

Steel CIS Export CR coil $ per tonne Black Sea/Baltic Sea

China: HRC & CRC prices China: Rebar & Wire rod prices

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

07.1 08.1 09.1 10.1 11.1 12.1 13.1 14.1 15.1 16.1

(RMB/ton) CR Sheet 25mm Average

HR Sheet 25mm Average

1,000

2,000

3,000

4,000

5,000

6,000

7,000

07.1 08.1 09.1 10.1 11.1 12.1 13.1 14.1 15.1 16.1

(RMB/ton)Steel Rebar 25mm Average

Wire Rod 25mm Average

Source: Bloomberg Finance L.P., DBS Vickers

Industry Flash Note

Basic Materials

Key Prices: Steel prices rebounded significantly in March, and stretched up further recently. The price growth is unlikely to be sustainable. Key Prices ; Both of Industrial metals and precious metal (gold, silver) prices are rebounding

LME Metal prices ALUMNM SPOT COPPER SPOT ZINC SPOT LEAD SPOT NICKEL SPOT MSCI AC World Metals & Mining

MSCI EMU Metals & Mining

1-wk % 4.3 2.4 6.4 3.1 5.0 11.8 8.8 1-month % 1.0 (3.3) 3.1 (5.5) 2.0 8.3 11.2 3-month % 4.8 10.7 26.0 6.8 6.3 42.0 40.0 Ytd % 2.7 2.7 16.7 (3.4) 2.5 26.2 30.6 Last price(US$/ton) 1,549 4,831 1,867 1,741 8,880 216.8 479.4

GOLD($/OZ)

SILVER SPOT($/OZ)

PLATINUM SPOT ($/OZ)

PALLADIUM SPOT ($/OZ)

LMEX LONDON METALS INDEX

Thomson Reuters CRB

DOLLAR INDEX SPOT

1-wk % (0.9) 5.1 1.7 3.3 3.7 4.8 0.8 1-month % (0.3) 5.7 2.8 (1.4) 0.1 2.2 (1.7) 3-month % 12.9 16.0 18.8 13.3 11.8 9.3 (4.0) 15.8 16.5 10.2 (0.5) 4.3 (0.8) (3.7) Last price 1,229 16 985 560 2,297 175 95

Iron ore & coking coal prices

China import Iron Ore Fines Fe content 62%

China import Iron Ore Fines 58%

China Import Indian Iron Ore fob

Australia Export Iron Ore BHP

(1Q11's contract)

Brazil Export Iron Ore CVRD (1Q11's

contract)

China Foundry Coke Domestic

Spot price 1-wk % 9.9 2.1 5.4 N/A 14.8 1.0 1-month % 6.9 (15.2) 1.9 20.2 6.9 1.0 3-month % 47.6 27.9 38.4 40.2 55.0 4.3 Ytd % 36.3 25.6 41.9 40.2 40.9 4.3 Last price (US$/ton) 59 55 56 56 62 151

Scrap & semi- finished steel prices

Turkey import Heavy Melt Scrap #1&2 80:20 (CFR Turkish port) per

metric ton

Iron & Steel Scrap China Domestic

Heavy Scrap Yuan/metric ton

Steel Scrap No 1 heavy melting

China Domestic Heavy Scrap (RMB/ton)

East Asia Import Slab (CFR) US

East Asia Import Billet (CFR)

1-wk % 9.0 3.9 0.0 9.0 6.7 18.2 1-month % 26.5 17.5 8.2 26.5 16.7 25.9 3-month % 38.3 38.9 (5.0) 38.3 16.4 42.9 43.5 38.9 33.1 43.5 17.2 48.8 Last price (US$/ton) 267.0 1,340.0 250 41 238 253

Benchmark Steel prices

Iron & Steel Steel Benchmarker Hot rolled coil World Export Market $ per ton

Iron & Steel Steel Benchmarker USA East of Miss Hot rolled coil $ per metric ton

Iron & Steel Steel Benchmarker USA East of Miss Cold rolled coil $ per metric ton

Iron & Steel Steel Benchmarker Hot rolled coil World Export Market $ per ton

Benchmarker prices Mainland China Hot rolled coil

Benchmarker prices Cold rolled coil Mainland China

1-wk % 2.0 3.8 7.1 0.0 0.0 0.0 1-month % 5.7 9.0 46.9 36.5 30.7 36.5 3-month % 10.4 15.3 62.8 47.2 55.3 47.2 Ytd % 10.4 15.3 64.4 46.1 55.3 46.1 Last price (US$/ton) 466 656 415 468 330 468

Benchmark Steel prices

China Domestic Steel Rebar 25 mm Spot AvPrice

China Domestic High Speed Wire Rod 6.5mm Spot

China Domestic Hot Rolled Steel Sheet Spot Price

China Domestic Cold Rolled Steel Sheet Spot Price

1-wk % 11.6 10.1 9.3 4.5 1-month % 16.5 15.3 17.3 6.0 3-month % 41.9 38.4 47.1 24.7 Ytd % 43.1 40.4 44.7 30.5 Last price (RMB/ton) 2,863 2,827 2,830 2,830

Source: Bloomberg Finance L.P, DBS Bank, DBS Vickers

Industry Flash Note

Basic Materials

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e.> -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

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This report is prepared by DBS Bank Ltd This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd,

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The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it

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Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)

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compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 18 Apr 2016,

Industry Flash Note

Basic Materials

the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities

recommended in this report (“interest” includes direct or indirect ownership of securities).

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Aluminum Corp of China, Jiangxi Copper recommended in this report as of 31 Mar 2016

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Industry Flash Note

Basic Materials

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