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Asian Metals & Mining
Iron ore up 65%? Steel prices
matter more.
J Clarke
Research Analyst
(852) 2203 6371
j.clarke@db.com
Julian Zhu
Research Analyst
(852) 2203 6207
julian.zhu@db.com
Sky Hong
Research Analyst
(86) 21 3896 2840
sky.hong@db.com
Steel prices offset iron ore costs
Iron ore contract prices have been settled in Japan and Korea at 65%, substantially
higher than DB's estimates of 45%. We expect this increase to be accepted in
China, too. However, the impact of higher raw materials costs is offset by steel
prices that are running well ahead of expectations. We have revised earnings for
all of the PRC steels to reflect the new iron ore price, higher coking coal costs, and
higher steel prices. We remain BUYers of Angang and Magang, and anticipate
strong performance as steel prices continue to rise.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from
local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to
request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Current Events
Top picks
Angang Steel (0347.HK),HKD18.62 Buy
Maanshan (0323.HK),HKD4.67 Buy
Companies featured
Angang Steel (0347.HK),HKD18.62 Buy
2006A 2007E 2008E
P/E (x) 5.3 14.3 13.4
EV/EBITDA (x) 3.9 7.8 7.8
Price/book (x) 2.1 2.1 1.9
Maanshan (0323.HK),HKD4.67 Buy
2006A 2007E 2008E
P/E (x) 7.8 12.8 10.0
EV/EBITDA (x) 6.9 7.9 6.4
Price/book (x) 1.3 1.5 1.4
Wugang (600005.SS),CNY22.07 Sell
2006A 2007E 2008E
P/E (x) 6.1 26.1 22.7
EV/EBITDA (x) 3.3 13.7 13.2
Price/book (x) 2.3 7.1 6.3
Baogang (600019.SS),CNY18.10 Hold
2006A 2007E 2008E
P/E (x) 6.3 20.8 15.1
EV/EBITDA (x) 3.7 9.6 8.0
Price/book (x) 1.9 3.6 3.2
Global Markets Research Company
Steel prices rising
Spot steel prices have been trending up in China since mid-2007, and have begun
another run post-Chinese New Year. To date, flats are up an average of 18% over
2007, and construction steel is up 24%. With demand typically strong after the
holidays as buying for new projects begins and some production having been lost
during the recent storms, we expect steel prices to continue to trend up. We have
revised our price assumptions slightly, expecting them to rise 15% and 5% in
2008 and 2009 from the previous 12.5% and 2.5%. Asian regional prices have also
been very strong year to date, with regional HRC up 21% and CRC up 19%..
Production growth moderating, demand robust
PRC steel production growth moderated steadily from April through yearend, even
as consumption growth remained relatively high. This was accompanied by a
steady decline in export volumes after the April peak. With FAI growth and IP
growth steady through yearend and expected to slow very slightly through 2008,
we expect demand to remain strong even as steel production growth slows. This
suggests that consumption growth will continue to support steel prices, driving
earnings at steel companies.
Earnings adjusted
We have adjusted earnings forecasts for the PRC steel companies to reflect the
65% iron ore settlement, as well as DB's forecasts of 60% increase in coking coal
(though domestic settlements have begun to come in much lower) and stronger
steel prices. Despite the hefty increase in raw materials costs, these are largely
offset by the relatively minor adjustment to steel prices. Furthermore, given how
far spot prices have run, we see substantial, potential, upside risk to earnings.
Valuations attractive, BUY Magang, BUY Angang
Magang and Angang are now down 49% and 52% from their peaks in October
2007. Magang is trading at 9.7x 2008E and 8.2x 2009E, and Angang is on 12.6x
and 8.5x 2008E and 2009E. We value these companies on a residual income
model (TP = BV * (ROE - g)/(COE - g), incorporating DB's A share market ests. for
RFR and MRP of 4.9% and 5.3%which gives us 32% and 49% upside potential.
Risks to our view: severe economic control measures, which impact the strength
of demand and steel prices (see fig 5-8 for eps sensitivities to steel prices). Slower
growth of the construction sector would affect Magang due to its reliance on long
products. Execution of new projects at Yinkou is a specific risk for Angang.
Table of Contents
Steel prices drive earnings ............................................................... 3
2008 steel prices far above 2007 levels....................................................................................3
Steel prices outweigh raw materials costs ...............................................................................4
New assumptions used in revisions .........................................................................................5
2007 steel data................................................................................... 6
Outlook - market trending toward balance................................................................................6
Production growth and breakdown...........................................................................................7
Breakdown of net imports by product type ............................................................................10
International pricing; pricing v. US$ index ...............................................................................11
PRC domestic spot pricing - HRC ...........................................................................................12
PRC domestic spot pricing - Rebar .........................................................................................13
2007 bulk materials trade ............................................................... 14
Outlook ..................................................................................................................................14
Iron ore trade and production .................................................................................................16
Thermal coal trade ..................................................................................................................18
Metallurgical coal trade...........................................................................................................19
Angang Steel.................................................................................... 21
Company update ............................................................................. 23
No storm damage...................................................................................................................23
Cost position..........................................................................................................................23
Product price moves...............................................................................................................23
Progress of the Bayuquan Project...........................................................................................23
Maanshan......................................................................................... 25
Update.............................................................................................. 27
Post-storm recovery................................................................................................................27
Costs......................................................................................................................................27
Product prices.........................................................................................................................27
Production plans .....................................................................................................................27
Baogang............................................................................................ 29
Acquisition details........................................................................... 31
Increasing capacity..................................................................................................................31
Recent company performance................................................................................................31
Valuation and risks ..................................................................................................................32
Wugang ............................................................................................ 33
Company update ............................................................................. 35
No impact from the storm ......................................................................................................35
Costs......................................................................................................................................35
Product prices.........................................................................................................................35
Production plans for 2008.......................................................................................................35
Risks ......................................................................................................................................35
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