Posted on 18 Nov 2020
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
Considering global economic recovery momentum and demand growth forecasts, we upgrade our rating on the steel/metal industry to Positive. With expectations for inflation and interest rate expansion creating a favorable investment environment, we advise loading up on leading domestic steelmakers’ shares, which are currently trading at attractive P/Bs of 0.27~0.45x.
Upgrade industry rating to Positive
We upgrade our rating on the steel/metal industry to Positive. Our upgrade comes two years and seven months after downgrading our industry opinion to Neutral in our Mar 2018 China Tour Report in response to weak supply-side factors (restructuring) and demand uncertainties. While it is unfortunate that there are currently no supply-side reforms in China such as those seen over 2016~2017, we believe that the uptick in steel demand being witnessed amid global economic recovery justifies upward re-rating.
We view the keyword for the 2021 steel/metal industry outlook as being ‘recovery’. The OECD leading economic indicator has rebounded sharply, and the IMF expects the global economy to grow 5.2% y-y in 2021. Although predicting that global steel consumption will fall 2.4% y-y this year, the World Steel Association (WSA) expects 4.1% y-y expansion next year. While China’s steel consumption should remain similar y-y in 2021, both advanced and emerging countries (excluding China) are expected to drive global steel consumption growth. As a result, POSCO and Hyundai Steel’s consolidated OPs are projected to increase 32.8% y-y and 331.5% y-y, respectively, in 2021.
Inflation & interest rate growth expectations positive for share prices
The US producer price index (PPI) has shifted positively from -1.5% in May to +0.4% in October. We note that inflation should serve as a factor boosting expectations for economic recovery while also stimulating demand for precious metals. Also favorable for the steel and metal markets, pressure from US bonds should continue to push up market interest rates overall. In the past, inflation and rising interest rates have tended to bolster steel prices, a situation which in turn has supported steelmakers’ share prices.
Although the share prices of domestic steel and metal companies have risen of late on expectations for economic recovery, major steel firms’ shares still trade at historically low valuations. We expect earnings to continue rebounding from 3Q20 after bottoming out in 2Q20. With expectations for the development of vaccines/treatments for Covid-19 on the rise, sector share prices should continue to rebound moving forward.
Source:Business Korea
