Steel producers offer bleak financial results, vague outlook

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30 Apr 2009

The outlook for Asia's steel industry isn't that bright at the moment, but it won't stay that way for too long, according to some analysts. Many of Asia's top steel producers have reported financial results in recent days, and the figures have been bleak , with most posting significant losses or declines in profit for the year.
Maybe even more troublesome for investors, many major steel firms are reluctant to offer outlooks, as the future for steel demand remains uncertain.
"Currently, Nippon Steel and others are wary about giving financial direction due to what are currently terrible market conditions," said Marcus Hudson, president and managing director at Hudson & Associates, a commodity hedging advisory firm.
On Tuesday, Nippon Steel Corp. said it incurred a net loss in the fiscal fourth quarter to March because of high input costs and drastic production cutbacks. It did, however, forecast it would break even for the full year started April. See full story on Nippon Steel.
Kobe Steel also reported on Tuesday a loss for the fiscal year, coming on the back of a write-down related to investments in securities. The company also said it will likely see a larger loss in the next year due to the uncertainty surrounding the world's economic recovery. See full story on Kobe Steel.
"There is consensus building as to the inevitability of higher prices" for steel, said Hudson. But "pin-pointing precisely when the demand shock will come is problematic."
"Additionally, given what's going on in the automotive industry and the fragility of an already devastated global economy, any short-term forecast, i.e. current quarter, are essentially worthless given the risk associated with near-term demand," he said.
Over in China, Angang Steel on Monday reported a 99.7% drop in its first-quarter profit to 8 million yuan ($1.2 million) from 2.45 billion yuan a year earlier as revenue sank 15.9%.
It said it sees a maximum net loss of 2.99 billion yuan for the first half of the year, blaming falling steel prices and weak demand.
Similarly, Shanghai's Baoshan Iron & Steel Co. posted a drop of 97.7% in its first quarter profit to 89 million yuan from 3.87 billion yuan. Revenue fell 31%.
The company said Tuesday that it expects net profit for the first half of the year to fall sharply from a year earlier on weak demand and an oversupply in the steel industry.
"Similar to other steel producers, Baosteel gave a pessimistic outlook, citing industry overproduction, reduced exports and sluggish real demand," analysts at Morgan Stanley said in a note to clients Wednesday.
The analysts pointed out that Angang also issued a warning for possible losses in the first half of 2009, which the company said are "highlighting the difficult environment the steel companies are facing."
In a research note Wednesday, Kathryn Ding, an analyst at BNP Paribas, said she remains near-term negative on Angang Steel and recommended that investors take profit on the stock.
Bright spot
But despite the poor results recently reported by steel companies, Hudson remains "bullish longer-term" on steel.
Shares of major steel producers in Asia seemed to reflect that optimism for eventual recovery. Shares of Angang Steel climbed 6.7% in Hong Kong, and Baoshan Iron & Steel's stock gained 2.1% in Shanghai.
Trading in Tokyo was closed for a holiday Wednesday but on Tuesday, shares of Nippon Steel and Kobe Steel closed higher.
Resource stocks joined the broader rally in Asia markets Wednesday. China's Shanghai Composite and Hong Kong's Hang Seng each climbed 2.8%. South Korea's Kospi closed up 2.9%, but Australia's S&P/ASX 200 fell by 0.4%.
"One thing is undeniable -- global governments have shown they are willing to spend as much money as necessary, primarily in infrastructure projects, to stimulate their economies," said Hudson.
"While this has been slow to translate into orders as of yet, it will inevitably lead to a significant pickup in demand in steel and base metals," he said.
"Combine this with what should be a late third-quarter/early fourth-quarter economic recovery, and we should see a significant pickup in capacity utilization, and hence prices, in the coming months," he said.
And the bottom may be near for steel producers as well.
A week ago, Macquarie Research upgraded Nippon Steel and Sumitomo Metal Industries to outperform from neutral, and JFE Holdings to outperform from underperform.
"We believe we are starting to see signs of a bottom for Japan steel stocks," analysts at Macquarie said in a research note last week.
They pointed out, among other things, that industrial production and exports in Japan seem to have bottomed, U.S. and global auto sales picked up in March and China's stimulus package "appears to be working, at least for now."

Source: MarketWatch