Regional Steel Update:China Steel March quotation price hike and supply side reform

China Steel hikes its March flat steel quotation price by about TWD300/t

Taiwanese China Steel announced its March quotation price hike averagedabout TWD300/t and that it might start to follow a more “quarterly” quotationprice for majority of its products, rather than adopting the 2 (months) + 1(month) quotation mechanism. For quarterly prices, China Steel has notchanged its price quotes. In short, the March quotation price hike will likelyhave very limited impact on China Steel’s 1Q16 results, and we see possiblebreakeven only in 1Q16, or continued loss-making as witnessed in Novemberand December 2015.

Price hike can be deemed as a catch-up

As flat steel prices have risen about RMB200/t from the trough, Baosteel hasannounced to hike its February/March prices. China Steel’s latest move can bedeemed as a catch-up to market prices. The TWD300/t hike, which equates toonly RMB50/t, should not be taken as a strong signal that the demand/supplybalance has improved materially, in our view.

Supply side reforms? Real test will kick in after CNY

On 4 December 2015, we published a note “Increasing supply curtailments butnot yet moving the needle” for monitoring the capacity shut-down in China. Wemaintain the view that poor economic conditions have indeed triggered somesupply curtailments. However, we believe it is overly early to argue thedemand/supply balance has seen structural improvement. We believe postCNY will be critical to observing whether demand is recovering and whethersome of the capacity will return to supply. In our view, the recent small steelprice hikes should not be signs of structural changes in demand/supply. Steelprices would have to increase another RMB400/t for 1Q16 steel profitability toreach 1Q15 levels, which nevertheless would still be insufficient to supportsteel mills’ book value.

Multiple factors affecting ex-China names; maintaining Hold

The supply curtailments in China and continued imposition of anti-dumpingmeasures on China should benefit ex-China producers. However, RMB’s recentdepreciation might offset such benefits. As such, we maintain Hold on ex-China steel names including NSSMC, JFE, and China Steel. Post CNY and inMarch, these names might be affected by a likely halt in steel price hikes andpossible weak annual results. As such, investors should be very cautious ifthey play the “China’s supply-side reform theme”. We would advise keep aprudent approach and wait till post CNY

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