China Steel Sector:Early June CISA output rebounds
China's steel output from large and medium sized mills (CISA members)bounced back 3.7% in early June (from late May levels) to 669Mtpa. Withcash spreads continuing to strengthen, the risk of supply rebounding toostrongly has emerged. At this point, inventories remain in line with historicaltrend levels. Given cheap valuations and signs that China’s industrial sectormay be bottoming, we stay OW Baosteel and Maanshan.
CISA output rose 3.7% to 669Mtpa. According to China Iron & SteelAssociation (CISA), daily crude steel output of the large and mid sized mills(CISA’s 90 members) for the first 10 days of June gained 3.7% to 1.83Mtpdor 669Mtpa (645Mt in late-May). No national output estimate was provided,but assuming a similar rise of 3.7% for small mills (non-CISA), nationaloutput may have risen to 870Mtpa (839Mtpa in late May). Assuming asimilar daily rate for June, China’s 1H14 crude output would be +6% y/ywith apparent demand +1.2% y/y (5M14 +2.6% and +0.1% respectively).
Steel inventories and iron ore stockpiles edge higher. Steel inventorieswith traders fell slightly to 13.8Mt (from 14.0Mt in late May) but producerstockpiles climbed to 14.8Mt (from 13.9Mt in late May). Taken together, weestimate CISA mills and traders now hold 13.7 days, up from 12.9 days inlate May but still below the historical levels of 14.2 days. On the rawmaterials side, early June iron ore stocks at Chinese mills edged higher to23.6 days, from 21.7 days in late May but still below historical levels of 28days. Iron ore stocks at Chinese ports (Steelhome survey of 40 ports)remained largely unchanged at record levels of 113.0Mt (from 113.2Mt inmid May), supporting c34 days of steel output (at current output rate,historical levels of c31 days), by our estimates. Meanwhile, domestic ironore utilization rates fell to 67% in early-June (from 70% in late May) butcoking coal mines rose to 82% (from 81%) during the same period.
Cash spreads firm despite weaker market sentiment. Sentiment amongststeel mills and traders remained weak amid soft steel prices. However, loweriron ore and coking coal prices pushed cash spreads for HRC higher to 18-month highs of RMB1,840/t (RMB1,780/t in late May) and rebar cashspreads of RMB1,624/t (RMB1,597/t in late May). While propertyindicators remain weak and May Steel PMI retreated back below 50, currentsteel market inventories are not high and widening cash spreads suggest astrong sequential lift in 2Q14 profits. Given what we see as attractive riskreward conditions, we stay OW Maanshan and Baosteel.