By Herbert Berger
Bernd Schroder
Bjorn Grob
Thomas Langer
Steel – a good chance for a super cycle
Customer profile: Continental European Investor
The steel sector, one of the ugly ducklings of investment, might turn out to be a bright star for investors with a specific appetite for risk also in 2004.
The world steel industry looks in better shape this year than ever. Improved prospects for the global economy, insatiable demand from China and consolidation moves among large steel producers have given them greater ability to influence prices and have made the profitability outlook over the coming months relatively rosy.
Recent data continue to confirm tight steel markets. Global steel production figures revealed that the global industry is now constrained on the supply side. Availability, pricing and scarcity of high-quality raw materials, especially coke, has led to a slowing of production growth across almost all of the major steel producing regions in contrast to previous cycles. And, as we continue to pass through this ongoing OECD recovery, steel shortages, in our view will likely persist.
This imposed supply constraint will likely maintain pricing power with the steel producers, which have historically taken around two quarters into an upturn to destroy their own pricing power through excess production. Inventory figures for the US and Europe continue to support the view that global steel consumers are running low on steel. Altogether, we see a good chance for a super-cycle in steel. How must an investor be positioned? In our view, short-term investors should be long in European steel. Medium-term, we see some worries in terms of over-capacity. The sharp rise in USD dominated raw material prices (coke and iron ore) is on the one hand moderated by the weakening greenback. Therefore, European companies – traditionally known to be high cost producers – do not face the same cost pressures as their competitors. On the other hand, strong demand from China, still very high freight rates and upbeat steel prices elsewhere prevent steel from vagabonding to Europe in a foreseeable time. This gives domestic producers enough scope for continued price increases despite the fact that demand in Europe is clearly lagging the rest of the world.
Investors should only be aware of two things: First, steel stocks are mainly momentum driven. When the steel price dynamic abates, steel stocks tend to pass their highs. Therefore, investors must strictly monitor their investments and be prepared for a turn of the cycle. A stop loss strategy seems adequate. Second, investors should focus on producers with long term contracts for raw materials. If the cycle holds on, iron ore and especially coke will be rare and spot prices should remain at current highs. Insofar, to fully capture the cycle, investors have to consider the ongoing sourcing difficulties. Incorporate these facts and stay tuned in European steel.
Contact:
Sandra Kühner Tel.: +49/(0)69-263 56515
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements:
Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words “may”, “will”, “should”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz Group’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro–US-Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences.
The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz AG’s filings with the US Securities and Exchange Commission. The company assumes no obligation to update any forward-looking information contained herein.
