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Steel-Favorable trends in China during peak season

April 14, 2014 08:53|April 14, 2014 12:40
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Favorable trends continue in China: Stable output, low inventories and wide
spreads Cina’s average daily crude steel output is near 2013 levels (2.072mn tonne) at 2.073mn tonnes as of end-March (Figure 1). Average daily crude output edged up 3.5% in January, 1.4% in February and 0.7% in March as growth slows rapidly. In comparison, China’s retail inventory fell 20.97 mn tonnes during a one-month period after the Lunar New Year (starting six weeks after the holiday, Figure 2). Given the falling retail inventories and flat output, we expect steel prices to be robust. As for raw materials, cheap supplies from January are being input. As such, the Chinese rebar spread has widened since early-March. Of note, the rebar spread neared the historical low of USD182 in early-March, but jumped 34.5% to USD245 over five weeks (Figure 3).
Spread to continue widening in 2Q14 on low input prices, POSCO shares to
rally higher China’s raw material costs for molten steel are USD293 as of the second week of April, and costs should fall another USD23 by end May to USD270. As peak season approaches, we expect strong steel prices on low retail inventories and flat output, despite the low raw material costs. As such, we believe the Chinese rebar spread will continue to widen. Given the correlation between POSCO shares and China’s rebar spread, we believe POSCO shares will also rally further.
*Source: Korea Investment & Securities Co.