The Chinese steel industry has benefited more than most as its economy takes the lead in emerging from the coronavirus-crisis and supply is hard-pressed to keep up with demand. It means that China’s beaten-down steel stocks, led by top producer Baoshan Iron & Steel Co., could be due a revival that puts the global competition in the shade.
National output has busted records by topping 90 million tons in each of the last three months. China typically accounts for about half the world’s steel, but in April that rose to 62% of the total. In June, it became a net importer of the metal for the first time in over a decade.
For all that, Baosteel’s valuation has remained tethered near its all-time low, and the stock has missed out on the broader surge in Chinese shares. That could change as the nation revs up its tried-and-tested vehicle for stimulating the economy and splurges on building programs.
“Chinese steel companies are on our watch list,” said Jiahe Chen, chief investment officer at Novem Arcae Technologies Co. “First of all, it isn’t a hot sector, which means we can buy at a very cheap price. Leading mills are very competitive as they are based on a huge Chinese market.”
Beijing’s return to its stimulus playbook will see local governments borrow record amounts to spend on infrastructure this year, which could mean red-hot demand for steel reinforcement bar. At the same time, renewed consumption of items like home appliances and cars has lifted steel sheet prices to two-year highs.
In the background, China’s ongoing consolidation of steel capacity in fewer, stronger hands, and its move up the value chain should help underpin stock prices. The biggest risks to the rosier outlook are persistently weak margins, if the price of key input iron ore stays elevated, and oversupply, if the sector isn’t sufficiently rigorous in curtailing overcapacity. A senior industry official warned in July that weak profits and even periodic losses will be the new normal for steelmakers.
Still, China’s mills look to be in far better shape than their global peers. Nippon Steel Corp., Japan’s leading producer and one-time world No. 1 by market value, said earlier this month it’s ambition to be the world’s most valuable steelmaker will have to be scaled back -- to most-valuable only outside China.
