Australian Steel Stocks - BSL, OST, SSX, SGM

Submitted by Craig Strzelecki on 13 March, 2007 - 04:03

An update about Australian steel stocks by analyst Citigroup Investment Research (CIR): The analyst's medium-term steel view falters; in contrast to expectations based on their macro driven view of the steel industry, Asian steel prices are up 5%-30% since the start of 2007. The analyst now focuses on near-term indicators of steel prices and increase their earnings forecasts for the volatile steel stocks in their coverage universe by up to 27% and upgrade their recommendation on BlueScope (BSL) to Hold. Current indicators suggest prices for most steel products, including scrap, HRC and long products, will rise further (>10%) over the next 3 months. Price drivers for steel: The stronger-than-expected rally appears to have been driven by strong consumption growth in predominantly China, Middle East and Europe, and tight scrap / pig iron supplies out of Russia and Brazil. The analyst have increased their F08e HRC and scrap price forecasts by 11% and 22% respectively. For reinforcing steel CIR now expect a 6% increase in F08e, up from +3% previously. CIR have also factored in higher iron ore price forecasts; +7% for F09e (vs -20% previously), benefiting OneSteel (OST). Leverage to steel upgrades; BlueScope (HRC) and Sims Group (scrap) have the largest and most immediate leverage to these upgrades. CIR have increased our F08e earnings forecasts by 27% for BSL and 4%-5% for OST, SSX and SGM. CIR’s F09e for OST has increased by 25%.