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Steel demand is expected to grow steadily
In 2009, driven by a package of economic stimulus policies, China’s fixed asset investment accelerated its growth and became the main driving force for expanding domestic demand and maintaining growth. It is estimated that the whole society's fixed asset investment will reach around 2,274,100 million yuan, and the nominal growth rate will be 32%, which is 6.5 percentage points higher than in 2008. It is the highest growth rate in the past 16 years. Excluding price factors, the actual growth rate of investment is 34.4. % is 2.26 times the actual growth rate of investment in 2008. In 2010, under the active fiscal policy and moderately loose monetary policy, fixed asset investment will maintain a relatively high growth rate. It is expected that the nominal growth rate will reach 23.9%, and the proportion of fixed asset investment in GDP will probably exceed 70%. Under the investment-driven economic pattern, domestic steel demand is expected to maintain steady growth in 2010.
Global recovery of steel production recovers
According to the prediction of the International Steel Association, the global steel apparent consumption will decrease by 8.6% in 2009 to 1.104 billion tons. It is expected that global steel demand will increase by 9.2% in 2010 to 1.206 billion tons. Among them, China will increase by 5.0% to 553 million tons. However, China's steel output is difficult to control in the short term. Data show that from January to November 2009, the total crude steel output was 518 million tons, an increase of 12.1% over the same period of last year. According to the current situation, crude steel production is expected to reach 564 million tons in 2009, a year-on-year increase of 12.7%. Although the National Development and Reform Commission and the Ministry of Industry and Information Technology will issue policies, they will focus on restraining the overcapacity situation in the steel and other industries. However, it is difficult to see obvious results in the short term. It is expected that crude steel production in 2010 will reach 627 million tons or more, an increase of 11.1% over the same period of last year.
Iron ore prices rise slowly
Due to the rapid recovery of global crude steel production, the supply of iron ore resources has also shown tremendous growth. According to Macquarie's forecast, the global iron ore shipping trade volume will exceed 1 billion tons in 2010, an increase of 12.8% from 2009. It is estimated that China will import more than 600 million tons of iron ore in 2009, an increase of more than 35% year-on-year. In recent years, the situation in which China’s dependence on imported iron ore continues to increase has been difficult to change, and an increasing trend in the price of iron ore has emerged.
Maintaining the rating of holdings of steel stocks We expect that the downstream industry’s demand for steel is expected to maintain a good momentum of growth under the influence of many factors such as the start of domestic demand, structural adjustment, and investment promotion. It is difficult for the iron and steel industry to release its own production capacity in the short term. The situation of oversupply will continue. Steel prices are expected to show upward trend due to multiple factors such as high inventory, increasing demand and rising raw material prices. After the iron and steel companies experienced losses and low profits, the operating conditions in 2010 are expected to continue to improve.
Judging from the secondary market, the current P/B ratio of the steel sector (based on the performance of the first three quarters of 2009) is 2.17 times, which is near the historically reasonable level. We maintain our rating on the holdings in the steel sector. We recommend focusing on investment opportunities of Baosteel, Angang, WISCO, Xinxing Ductile Iron Pipes, Jiuquan Hongxing, and Valin Steel.
Industry observation: The iron and steel industry is expected to improve its operating conditions this year
According to the forecast of the Department of Economics of the Chinese Academy of Social Sciences, the GDP growth rate in 2010 will steadily rebound to the level of about 9%. Under the active fiscal policy and moderately loose monetary policy, fixed asset investment will maintain a relatively high growth rate. The proportion of investment in GDP will probably exceed 70%. We expect that in the investment-led economic environment, domestic steel demand in 2010 is expected to maintain steady growth. The current P/B ratio of the steel sector (based on the performance of the first three quarters of 2009) is 2.17 times, which is near the historically reasonable level. We maintain our rating on the “overweight†steel sector.