FT : Global steel demand to slow as Chinese economy cools

Global steel demand will slow this year and in 2015 because of a slackening of growth in China, the world’s biggest consumer of the commodity, hitting the profitability of steelmakers.

The World Steel Association, the industry’s main international body, said on Wednesday it expects global demand to rise 3.1 per cent in 2014 to 1.52bn tonnes – down from growth of 3.6 per cent last year. Global steel growth will accelerate slightly in 2015, rising 3.3 per cent.

However, despite the global slowdown, some steel companies will have an improvement in profits driven by a recovery in developed countries. According to WSA, steel demand over the next two years is likely to depend more on developed economies, such as the US and Europe, rather than emerging countries – a big change from recent history.

The new forecast, revealed as chief executives at some of the biggest steelmakers gathered in London at the twice yearly meeting of the WSA, provides further evidence that China has come to the end of its rapid growth, as the world’s biggest steel producer moves from an investment to a services-driven economy.

The WSA said Chinese demand for the commodity would rise just 3 per cent in 2014 to 721m tonnes, compared with growth of 6.1 per cent last year. In 2015, growth is expected to slow further to 2.7 per cent.

“We’ve all become used to China being the driver of the world economy, particularly in resources, over the past decade or so. We think that’s an era coming to an end,” said Edwin Basson, director-general at WSA.

Weaker steel demand is being felt broadly across all emerging markets, down to ongoing structural problems in many of these economies, the WSA said. Demand in emerging countries is forecast to slow from 5.1 per cent last year to 3.2 per cent in 2014.

According to Mr Basson, a slowdown in China and unstable political situations in other emerging economies will result in just “moderate growth” in the steel industry – a far cry from the early 2000s when global demand for the commodity rose more than 6 per cent a year for six years in a row.

“There’s no candidate waiting in the wings to take over this lead role from China,” said Mr Basson. He said India is the most likely country to have big growth, but this is unlikely to happen in the near future as it is constrained by high inflation and structural problems.

The forecast bodes badly for top steelmakers such as ArcelorMittal, Tata Steel, Chinese groups including Hebei and Baosteel, South Korea’s Posco and Japan’s Nippon Steel.

However, demand for steel in developed economies is forecast to grow 2.5 per cent in 2014, following a contraction of 0.3 per cent last year. The US is forecast to make a strong recovery, with steel demand expected to grow 4 per cent to 99.4m tonnes, on the back of a pick-up in construction activity and manufacturing.

European demand is forecast to rise by 3.1 per cent this year, following a contraction of 0.2 per cent in 2013. The pick-up will provide a boost for companies’ earnings, particularly Europe-based steelmakers such as ArcelorMittal and ThyssenKrupp, which have been hit by weak demand on the continent in the construction and car industries.

(Makor) Special situations/event: Debenhams (DEB LN): pass

Special situations: Debenhams (DEB LN)

Cheap – but for a reason - pass
DEB LN: 79p
April 8, 2014
There has been press reporting that Sports Direct International (SPD) has sold its 4.6% stake in DEB and also sold a put option agreement covering 6.6% voting rights. Further details on the put option were not disclosed. When SPD acquired its 4.6% stake, it said that it intends to be a “supportive shareholder” and “wishes to explore options at an operational level to work together”.  Although, the exact intentions of SPD and its controlling shareholder, Mike Ashley are not known, we note that Mike Ashley has a track record of buying brands at distressed levels. In addition, he had been linked with other retailers (such as Matalan) on JVs/stake acquisition.

On the fundamental side, DEB continues to be a laggard vis-à-vis its peers. DEB is pushing through an aggressive online strategy to counter declining sales at its stores due to structural changes in the sector. Although, this strategy is contributing to the top-line growth, it is coming in at the expense of operating margins.  Among its peers, DEB has the lowest operating margins and consensus expects them to decline going further. On the other hand, the consensus expects margins to expand both for Next and MKS. We believe that DEB has a long way to go before it catches up with its competitors, who have more competitive online product offerings and better cost structures.

On relative value grounds, DEB looks fair value/overvalued vs its peers, despite being cheap in absolute terms. On a DCF basis, we value DEB at ~81p a share (~3% premium to current price).  Overall, we believe that DEB lacks any immediate catalysts that could positively re-rate the share price in the short-term.

The stock would only  become a buy if a case can be made for margin expansion which is the case for now.
FULL REPORT ATTACHED

FT : Lafley takes first big step to reshape P&G with $2.9bn pet brands sale

AG Lafley has made his first big move to restructure Procter & Gamble since returning to be its chief executive for a second time by agreeing to sell three of its pet food businesses to Mars for $2.9bn.

In the all-cash deal announced on Wednesday Mr Lafley is reversing one of his predecessor Bob McDonald’s deals by selling off the Natura pet food business he acquired in 2010.

The move is part of P&G’s effort to focus on core businesses and boost its sales growth and profitability to win back the favour of investors who were unhappy with its performance under Mr McDonald, who stepped down last June.

The other businesses P&G is selling are Iams and Eukanuba, which the consumer goods group acquired in 1999. P&G shares rose 0.8 per cent to $81.98 in early New York trading after it announced the divestiture.

Mars Petcare, part of a privately owned group better known for its chocolate, will add the businesses to its portfolio of pet brands, which include Whiskas and Pedigree.

Mr Lafley said in a statement: “Exiting pet care is an important step in our strategy to focus P&G’s portfolio on the core businesses where we can create the most value for consumers and shareowners.”

The companies expect to complete the transaction in the second half of 2014, subject to regulatory approvals.

Todd Lachman, global president of Mars Petcare, said: “The deal reinforces our leadership in pet nutrition and veterinary science, attracts world class talent and grows our world-leading portfolio.”

>>> This is the bank to watch for a Chinese credit implosion

{http://bit.ly/1eqKUZr}

China Minsheng Bank has been growing fast since it became the mainland’s first privately-owned commercial bank in 1996, serving the private companies and small businesses that state-owned banks have notoriously neglected.

That fast growth is coming back to bite Minsheng now though—the bank is China’s most at-risk financial institution, according to a growing chorus of analysts and rating agencies.

Minsheng has the lowest Tier 1 capital ratio in the sector, analysts from Citigroup wrote March 30, and “is most leveraged and most exposed to off balance sheet exposures.”
Minsheng suffers from a “volatile business strategy, rapid growth, large exposure to micro-enterprises, high counter-party risk from greater interbank lending, including to some smaller, weaker financial institutions, thinning liquidity and modest loss-absorption capacity,” Fitch Ratings analysts said when they downgraded the bank in December.
Minsheng “is the most aggressive one by far,” CLSA analysts wrote April 1.

The most obvious sign of trouble is that Minsheng’s impaired loan totals are rising steadily, up more than 27% from the end of 2012 to the end of 2013 to 13.4 billion yuan. As a percentage of total loans they’ve also risen to 0.85%.

And the true picture is more grim, because Minsheng wrote off 4 billion yuan of non-performing loans, and transferred another 7 billion off the bank’s balance sheet. Without those write-offs and transfers, Minsheng’s underlying NPL formation rate would have been 135% higher, Citi analysts concluded.

Minsheng is, in some ways, the most progressive and nimble of China’s banks. Under chairman Dong Wenbiao, Minsheng has aggressively lent to everyone from small dairy farmers to rickshaw tour operators to big private real estate developers, customers that China’s state banks have mostly shunned. That puts it at “ground zero” as China tries to modernize its financial system, as the Wall Street Journal explained last year.

But Minsheng’s relatively short history, and the truncated history of private big business in China overall, may not have prepared the bank for the slowdown that China’s economy is now facing. “You have a scenario where these guys have never gone through a credit cycle,” Bernstein Research analyst Mike Werner told Quartz, referring to Minsheng and other private Chinese banks.

The bank is now heavily exposed to some of the country’s sickliest sectors.

Minsheng Bank’s bad loans with the steel trade in Shanghai area “accounted for 50% of the bad loans in the entire steel industry,” an unnamed industry insider told Caixin last year (link in Chinese), and bank has lent 3 billion yuan or more to the troubled Highsee Iron and Steel Group, China’s largest private steelmaker.
The behind-schedule ship building industry is giving Minsheng “a big headache,” a bank executive told Reuters, because the ship builders’ foreign clients are demanding refunds from the bank.
Minsheng has 300 billion yuan in “wealth management products,” or 9% of its total assets, JP Morgan estimates. These off-balance sheet loans are often used to fund risky development projects.

Even without those questionable loans, smaller Chinese banks like Minsheng have it tough. They are under pressure to make loans to local governments and political big shots, who often own stakes in the bank, Werner said. Unlike big state-owned banks, they don’t have any implicit government support if they get overwhelmed by bad loans. To make matters even worse, deposits are shrinking industry-wide, as internet companies (described as “vampires” by banks) offer higher-yielding investments and the Chinese government encourages new private banks to enter the market.

“They are just riding the tide,” Werner said. “If the tide goes out, there’s little they can do to protect themselves.”

>>> US Gapping down

Gapping down

In reaction to disappointing earnings/guidance: ISRG -9.8% (also initiated with an Underperform at Sterne Agee), MG -4.4%, SAIC -2.7% (light volume), WDFC -1.1% (light volume), HCLP -0.8% (also announces acquisition of Augusta Facility and provides updated guidance for Q1; Co sees Q1 EBITDA of $18.8-19.5 mln; announces primary offering of 4.25 mln common units).

Select metals/mining stocks trading lower: HMY -1.9%, SLV -1.2%, AU -0.9%, ABX -1%, GDX -0.7%, SLW -0.5%, GG -0.5%, GOLD -0.4%, NEM -0.4%.

Coal names lower following downgrades: ACI -3.5% (downgraded to Sell from Neutral at UBS), ANR -2.5% (downgraded to Sell from Neutral at UBS; tgt lowered to $3 from $5 ), WLT -1.2% (downgraded to Sell from Neutral at UBS)

Other news: RLYP -7.1% (commenced an underwritten public offering of shares of its common stock to raise aggregate proceeds of $80 million), AVIV -3.9% (commenced an underwritten public offering of 8 mln shares of its common stock), AHT -3.8% (announces offering of 7 mln shares of common stock), HALO -3.5% (announced that the United States Food and Drug Administration informed the co yesterday that a clinical hold has been placed on patient enrollment and dosing of PEGPH20 in an ongoing Phase 2 trial (Study 202) evaluating PEGPH20 in patients with pancreatic cancer), LJPC -3.4% (following late move higher -- was up more than 12% on the day), GM -2.4% ( fined $28k by NHTSA; also General Motors is late in ignition switch fix deliveries, according to reports; downgraded to Underweight from Equal-Weight at Morgan Stanley ), TM -1.8% (Toyota Motor announces new recalls ), AAL -1.1% (announces ~17.2 mln shares of convertible preferred stock will be converted into common stock as of close of business April 8, 2014), CHS -1% (late move higher after Leonard Green discloseD new position in amended 13F; adds 2.05 mln shares; filing is as of 12/31/13), IMGN -0.9% (announces first clinical findings with refined dosing strategy for IMGN853: Initial Findings Show New Dosing Approach for IMGN853 Achieves Objective).

Analyst comments: FNFG -2.8% (downgraded to Underweight from Overweight at Barclays; tgt lowered to $9 from $11), ARO -2.2% (downgraded to Underweight from Neutral at Piper Jaffray ), HSY -1.2% (downgraded to Sell from Neutral at Goldman), ENL -0.8% (downgraded to Underperform from Neutral at Exane BNP Paribas), APA -0.7% (downgraded to Hold from Buy at Deutsche Bank), F-0.3% (estimates and target lowered to $17 at Morgan Stanley), CS -0.2% (downgraded to Underweight from Neutral at JP Morgan)