The author is an analyst of Shinhan Investment Corp. He can be reached at firstname.lastname@example.org. -- Ed.
The global steel industry suffered sharp increases in feedstock prices and decline in demand sparked by US-China trade disputes in 2019. With the COVID-19 pandemic further weighing down on market conditions this year, most global steelmakers are planning to cut output. However, China is moving in the opposite direction. The country expanded the size of its steelmakers through restructuring, and will likely focus on expanding its influence in the global steel industry through massive crude steel production. China’s aggressive move should further strengthen its dominance over competitors in a market hit by COVID-19.
Initiate coverage with NEUTRAL view
We initiate our coverage on the steel/nonferrous metal sector with a NEUTRAL view for the following reasons. First, the global steel market faces growing concerns over oversupply due to increasing crude steel production in China, amid weakening demand from the pandemic and US-China conflicts. Second, the rising influence of Chinese steelmakers, which have expanded their size through M&As, poses a long-term threat to Korean players. Third, steelmakers are expected to see limited improvement in profitability due to higher feedstock prices and delays in ASP hike caused by weakness in downstream market conditions.
Top pick: POSCO
We recommend POSCO as our top pick in the steel/nonferrous metal sector. Investment points are as follows. First, the company has maintained its profitability at relatively solid levels compared to global peers, and boasts sound financial health as the largest steelmaker in Korea. Second, POSCO has been aggressive in improving shareholder return. The trust agreement for a KRW1tr share buyback signed in April confirms the company’s strong commitment to shoring up its share price. The steelmaker paid out dividend of KRW1,500 per share for 1Q20, which seems reasonable considering market conditions. For full-year 2020, the dividend payout should be kept at KRW10,000 per share levels. We find POSCO attractive as a defensive play amid mounting uncertainties in the market.