Steel

Steel 

- Massive loss in 2Q15. Only downstream business survives

The steel sector faced a massive net loss of B2,926m in 2Q15, continuing from a loss of B3,115m in 1Q15, mainly because of SSI which showed a loss of B3,236m in 2Q15. SSI’s upstream business in the UK was adversely affected by a 9%qoq decrease in a steel slab price because global metal prices had declined so significantly that the metal spread could not cover the high conversion cost. Meanwhile, producers of long products (steel bar and steel wire), which are TSTH and BSBM, have been impacted by a steel bar price which made a historical low at B16,000/ton; yet, they were able to prevent massive loss by a cost control strategy, using a low-price billet and scrap as raw materials to average the cost. On the other hand, downstream steel producers, which are MCS and TMT, could show strong profit against peers. Particularly, MCS was able to maintain a good profit of B153m because a selling price of structured steel fabrications has stayed high at JPY247,000/ton, against a decreasing selling price of commercial grade steel worldwide, while demands from Japan is still good, resulting in a continuous export of 12,000 tons. 

- Dull earnings in these two years  

The sluggish economy of China, with GDP growth forecast of only 6-7% this year, would negatively affect global steel industry as China is the biggest steel consumer and producer of the world. Given the weak local demands in China and CNY depreciation, we believe China may increase its steel export to other regions. Combined with the current problem of overcapacity, reflected from global utilization rate of only 68.4% in July, the steel price may remain low in 2H15 until 2016. We project the steel sector to face a net loss of B7,210m in 2015, which may turn out worse than estimate, mainly because SSI has to bear loss from SSI UK. 

- Underweight. Top pick is MCS  

Owing to surrounding negative factors and dull earnings outlook of the sector, we reiterate UNDERWEIGHT recommendation. Top pick is MCS([email protected]) because its current backlog of 230,000 tons is suffice to generate high income for the next five years and it is the only company that has not been affected by the slow economy in China and Thailand and decreasing steel price.