Metals &Mining:2Q17Downstream update Steels appear favorably positioned
Downstream sector positioning remains mostly positive
Global aluminum and US Hot-Rolled Coil (HRC) prices increased 11% and 6%,respectively, in 1Q17 and our Downstream coverage gained 14% asIndustrial/Infrastructure growth optimism and shareholder activism outweighedAerospace destocking and slowing of Automotive end-markets. We continueto favor non-integrated companies and those that could benefit from higherUS-centric growth rates, particular construction and infrastructure-linked Steelnames. We retain overweight the sector with 9 Buys, 4 Holds and 1 Sell. Toppicks: Commercial Metals/Steel Dynamics in Steel and Arconic/Kaiser inAluminum. We remain Sell-rated on Century Aluminum on valuation.
Turning relatively more positive on Steels outlook vis-à-vis Aluminums for 2017
We believe the current market conditions remain supportive. US apparentdemand should increase in 2017 (after two consecutive years of contraction)on stronger domestic economic activity, with renewed demand growth in Non-Residential Construction/Energy markets, while, Auto continues to remainstable. Service Center shipments data YTD thru February show volumes +3%YoY. Trump’s potential (up to $1tn) infrastructure spending plan could driveincremental demand over medium-term (2018 and beyond). US sheet steelprice rally resumed uptrend in March as mills announced another $30/st hike.
Low inventories and declining imports should continue to support steel pricing.
We maintain Buys on six out of seven Steel & Service Center equities covered.
Aluminum rally driven by surge in Global LME pricing, despite US headwinds
Alcoa and Century Aluminum have benefitted from higher LME aluminum(+10% YTD) and Midwest premium (+20%). However, DB’s commodity teamanticipates Chinese smelter additions are likely to drive down pricing untilpossible heating season curtailments (beginning in 4Q17). We considerCentury Aluminum relatively expensive after rallying 48% YTD and anticipate apullback, re-iterating our Sell. Constellium and Kaiser trade below groupaverage valuation (7.5x 2018E EV/EBITDA) and have remained relatively flatYTD indicating a Buy opportunity. Lastly, we believe Arconic (trading at 8.5x)now deserves a higher valuation multiple (9.5x) due to Elliott Management’sincreasingly hostile activism to replace management with an aggressive costcuttingteam at May 16 shareholder vote and re-it Buy.
DB commodity view – positive momentum but entering mature cycle
The industrial metals complex has had a strong start, with Chinese demandmomentum especially in infrastructure, being a lot stronger than anticipated.
DB’s commodities team think that the cycle is now entering a mature phase,and the outlook for the end of the year and early 2018 is far less bullish. Of theindustrial metals, most relevant to our Downstream equity universe, aluminumprices remain unchanged vs. February 28th revision, while Nickel cut 10% in2017 on ample inventories and scarcity scenario far less likely in 1H. Onimproving domestic pricing, we have raised our view on 2017 Hot Rolled CoilSteel prices by 5% to $630/ston and retain $600/ston view for 2018E.
Valuation wrap and risks (details, p. 40-43)
On average, our PTs are based ~7.3x 2018E EV/EBITDA. Risks includethe possibility of equity dilution, end-market demand, metals prices.
This report changes PTs and earnings estimates (see Figure 11).