Steel Prices Are Skyrocketing in China: Five Of The Largest Steelmaker Stocks to Own 1

Steel prices are surging in China

Steel prices in China (FXI)(MSCHI), the world’s largest steel producer are surging, backed by speculation of a supply cut and rising demand. The Chinese government has been struggling with tackling the problem of overcapacity in the sector in the past few years and has imposed sanctions to cut down on excess inventory. This is also hurting steel producers in international markets as China is selling its excess inventory at lower prices in global markets.

In March 2017, the Chinese government announced plans to cut steel production capacity by 50 million metric tonnes to curb excess supply. Experts believe the possibility of a cut in steel supply by the end of the year is driving steel prices upwards in the country. The Chinese government has called on steel producers in the largest producing provinces — Hebei, Shanxi, Shandong, Henan as well as Tianjin and Beijing to cut output by nearly 50% during the winter months of November to February. The Hebei province accounts for nearly one quarter of China’s steel production. This is also leading to volatility in steel prices which has resulted in the government taking efforts to manage market stability.

Richard Lu, an analyst at CRU consultancy based in Beijing stated in an interview with Reuters, “In anticipation of less supply of steel, there should be some traders and end-users bringing forward their purchase plan”. He continued, “Because of expectations of reduced supply, prices may rise further in coming months, so it’s better to buy now.”

- Advertisement -

Seth Rosenfeld, an analyst at Jefferies International mentioned, “While Chinese steel margins appear unsustainably high, mounting supply restrictions may prolong the current up cycle to the benefit of global steelmakers”. He commented further, “Chinese supply side reform, leading to lower exports at higher prices, has done far more to buoy global steel markets than Trump or any other Western politician could achieve.”

Steel rebar futures for the October 2017 contract trading on the Shanghai Futures Exchange are up 65% in the past one year and have gained 40% in 2017 so far.

Analysts expect steel prices to remain elevated as the government continues to curb steel production. Nomura analysts expect crude steel output to decline by 5-10%. “Output in China’s steel industry has sometimes been curtailed temporarily in order to tackle environmental problems, but we think the production cutbacks in the latest measures will be substantial compared to the other occasions,” wrote the Nomura analysts.

Higher steel prices lead to better profits for the steel industry but also result in higher costs for sectors that use steel as a raw material. For the steel industry, higher steel prices translate to stronger earnings, and a recovery after China’s economic slowdown last year led to a sharp correction in global commodities. Chinese steel producers also stand to benefit from rising margins between steel prices and raw material costs such as iron ore and coking coal.

S&P expects India, Japan and South Korea’s steel companies to benefit from a cut in steel exports from China.

Are Chinese steel companies a steal now?

Year to date, the MSCI China Materials Index has surged 35% while the Vaneck Vectors Steel ETF (VLX) has gained 28%.

Comparatively, the Bloomberg Steel Producers Composite Index has seen gains of 21.5%. The Bloomberg Steel Producers Composite Index is composed of the largest steel stocks in the world including the largest Chinese steel producers.

The largest Chinese steel stocks listed on the Shanghai Stock Exchange by market capitalization are Baoshan Iron and Steel, Inner Mongolia Baotou, Angang Steel, Hesteel Co, and Beijing Shougang Co. Year to date, shares of these companies have returned 40.5%, 50%, 62%, 58% and 20.5% respectively.

Baoshan Iron and Steel

Baosan Iron & Steel, (600019.SS) commonly called Baosteel is China’s largest steel producer. The company exports to nearly forty countries and regions, the largest being Japan, South Korea, United States and the European Union. Baosteel’s shares are listed on the Shanghai Stock Exchange (C2BC.F) and Shenzhen Stock Exchange (399107.SZ) and are a constituent of the CSI 300 stock market index.

In 2016, the company recorded sales of $27.8 billion, highest among its Chinese peers. YTD, shares of the company have gained 40%, and have outperformed emerging markets indices as well as Chinese stock markets.

Inner Mongolia Baotou Steel

Inner Mongolia Baotou Steel Union (600010.SS) was established in 1997 as a subsidiary of Baotou Steel. Baotou Steel is the largest steel company in Inner Mongolia. It is primarily engaged in exportation of mineral resources and manufacture of iron and steel products. The company sells its products in both domestic as well as international markets.

In 2016, Baotou Steel recorded sales of $4.6 billion and operating margins of 0.9%. YTD, shares of the company have gained 50%.

Angang Steel

Angang Steel (ANGGY), also known, as Ansteel Group is a joint stock company owned by Anshan Iron and Steel Group and is supervised by the Chinese state government. It is the third largest Chinese steel producer by sales. In 2016, the company recorded sales of $8.7 billion and operating margins of 4.3%. The company has an annual crude steel capacity of nearly 24 mt and can produce up to 21.5 mt of finished steel annually. Last year, the company produced 33.2 million tonnes of steel and ranked 7th globally in terms of annual steel production. Angang’s steel products have a 25% market share in home appliance and 20% market share in auto manufacturing as per a report by DBS Securities.

Shares of the company are dual listed on the Shenzhen and Hong Kong Stock Exchange with the tickers 000898.SZ and 0347.HK. YTD, shares of the company have gained 62%, and have been the best performing stock among Chinese steel producers.

Hesteel Group

Hesteel Group (000709.SZ) is the second largest steel producer in China and the third largest in the world by output. As per data compiled by World Steel Association the company produced 46.2 million tonnes of steel in 2016, second only to Baosteel and Arcelor Mittal (MT) which produced 95.5 million tonnes and 63.8 million tonnes of steel respectively.

In 2016, the company recorded sales of $11.2 billion, second highest among its Chinese peers.

YTD, shares of the company have gained 58%, and have outperformed emerging markets indices as well as Chinese stock markets.

Shougang Group

Shougang Group (000959.SZ) is the fifth largest Chinese steel company by market cap and the eighth largest by revenues. In terms of steel production, Shougang Group ranked ninth globally, with an output of 26.8 million tonnes in 2016. The company is based in Beijing but has moved its operations out of the city due to concerns of pollution prior to the Chinese Olympics.

The company also has operations in South Peru know as Shougang Hierro Peru and operated the Marcona Mine in the Marcona District in Peru.

In 2016, Shougang Group generated revenues of $6.3 billion and operating margins of 5.1%. Shares of the company’s subsidiaries are listed on the Shenzhen and Hong Kong Stock Exchanges. In 2017 so far, shares of the company have surged 20.5% and have underperformed its peers.

Analysts opinion

Sell side analysts remain bullish on Chinese steel producers as they gain from higher margins with steel prices continuing to surge.

JPMorgan however has a contrarian view to offer. JPM analysts Po Wei and Scott Darling believe China’s economic fundamentals do not support higher demand for steel. They also believe steel stocks are currently trading at extremely expensive valuations and forecast downside for Chinese steel stocks.

The analysts stated in an investors’ note, “The improvement in cement & steel margins in 2016 can be explained by property-driven demand recovery and seasonality, more than the impact of capacity cuts. If the stated 85mt (or 7%) of capacity were really closed, we should have seen stronger margin expansion in 4Q than companies have preannounced. We believe most capacity reported as ‘eliminated’ was already idle, and that the practice of shutting idle capacity will continue in the near term – with limited impact on operating margins. Despite weak fundamentals, most cement and steel companies are trading at above their three-year peak multiples.”

JP Morgan expects 26% downside for Angang Steel and 31% downside for Maanshan Iron.

Angang Steel has received 11 buy ratings, 4 sell and 5 hold ratings, while Maanshan Iron and Steel (0323.HK) has 8 buy ratings and 5 sell and 2 hold ratings. Comparatively, Baosteel has received 18 buy ratings and 1 hold rating while Hesteel has received 5 buy ratings and 1 hold ratings.


Valuations within the materials sector in China are stretched with the MSCI China Materials Index trading at a one-year forward price to earnings ratio of 16.5x.

Maanshan Iron & Steel, Angang Steel and Baosteel are the most attractive stocks based on their cheap valuations. These stocks have one year forward PEs of 10.7x, 12.3x and 13.2x and are trading at the steepest discount to their peers. Meanwhile, Baotou Steel, Shougang Group and Hesteel are currently expensive with PEs of 159x, 29.4x and 25.4x respectively.

- Advertisement -