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As emerging markets mature and
progressively move toward high end
steel products, Japan’s steel producers
will be strongly positioned to benefit
Surging costs in the near term however
should see a brief dip in profits this
year, but we expect a quick return to
sustainable profit growth
We initiate with an OW (V) on JFE
Holdings and N (V) on Nippon Steel
Medium term shortage in high end steels likely.
Characterised by high barriers to entry, high end steel supply
have struggled to keep pace with growing demand, mainly
led by emerging markets. Since 1992, world consumption
for coated sheets grew by +6%pa, with China’s +23%pa
growth representing a significant portion of this. While new
Chinese high end steel capacity poses a threat to the current
tightness, we believe the Chinese government’s efforts to
contain exports will mitigate this risk. In any case, Japan’s
experience and technical leadership in high end steels should
ensure that it maintains and grows its market leadership.
Storm clouds passing. It has been a stormy period for
Japan’s steel producers recently as a surge in material costs
have weighed on profits. While sentiment is currently
fragile, key iron ore and coking coal costs are now largely
settled and we believe most of the bad news has now been
discounted by the market. Contrary to consensus opinion,
HSBC expects the current tightness in iron ore and coal to
ease by H2 of this year which should see cost pressures for
steelmakers abate. Meanwhile, price hikes are underway.
PE premium over regional peers to be restored. JFE and
Nippon Steel have historically traded at a premium (c10%)
to their regional peers. In our view, this reflects their focus
on high end steels which show up in higher EBIT/t margins.
This premium has recently unwound but we expect it to be
restored as tightness in high end steels persists
Investment thesis 4
Leverage to the high end 4
Steel markets to remain tight 5
China’s reduced threat 6
Near term issues 7
Corporate strategies 8
Valuation and Ratings 9
Risks 9
Global steel – Tight markets
through to 2013 12
Capacity utilisation 12
Steel trade: countries in shortage 13
HSBC Global Steel model 14
HSBC Japan steel model 15
Asian steel margins 16
Asia ex-Japan vs. Japan 16
JFE vs. Nippon Steel 17
Iron Ore – Making hay while
the sun shines 19
Dispelling conspiracy theories 19
Coal prices to stay high, but
not at current levels 24
Coking coal at all-time highs 24
JFE Holdings: Takes the lead 27
Nippon Steel: Time to deliver 36
Appendix: Japan industry 46
Overview 46
Steel trade 48
Prices 51
Industry history 55
Cross shareholdings 58
Disclosure appendix 68
Disclaimer 72
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