China’s steelmakers will see a rebound this year thanks to weakening iron ore prices and potential policy easing in the property sector, Helen Lau, senior analyst metals and mining at UOB Kay Hian in Hong Kong, told CNBC on Wednesday.
“We think China’s steel sector still faces overcapacity issues and high debt-to-equity ratio, but we see signs of a turnaround in demand and earnings in 2012,” said Lau, whose top pick is Angang because of its exposure to flat steel products, which are mostly applied to consumer products such as home appliances and autos.
Her predictions are in contrast with warnings coming from traders and industry leaders. Zhu Hongren, chief engineer at China’s ministry of industry and information technology, says that weak demand will aggravate oversupply in the domestic steel market and that high raw material prices will continue to weigh on the sector this year.
Lau believes 2012 represents a rare opportunity to invest in Chinese steel stocks because iron ore prices may lag steel prices. This would imply that steel producers’ earnings are bottoming out. She also sees external demand picking up and expects domestic steel consumption to grow by 6 to 7 percent year-on-year in 2012-2015.
“Compared to 2011, there are signs of a demand recovery in sectors such as automobiles and home appliances. The Chinese government’s efforts to continue to build affordable housing should also support demand from the construction sector,” Lau said.
Low margins and high interest rates have translated into rising debt ratios for China’s steel industry. According to Reuters, the country’s steel mills have accumulated as much as $400 billion in debt, pushing the median long-term debt-to-equity ratio for the sector to around 50 percent and raising questions over the solvency of some steel producers.
However, Lau says that steel firms should not find it difficult to meet their obligations this year. “As earnings show signs of improvement, Chinese steelmakers should be able to repay debt from their internal sources,” Lau said.
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Neither Helen Lau nor UOB Kay Hian hold any position in Angang.