Goldman Sachs Global Investment Research
Europe: Steel
Twin engines: DM recovery and commodity tailwinds; Aperam to CL-Buy
Stainless: Macro recovery and better D/S
Stainless steel consumption has more upside leverage to GDP growth and grew 14%-18% more than carbon steel in the past two economic upturns as consumer expenditure recovered. The stainless D/S balance is improving through capacity cuts in Europe and improving demand.
Bullish on nickel, bearish on iron ore
Our commodities team is more bullish on nickel following the Indonesian nickel ore export ban and we expect prices to rise by 9% to $16k/t in 1Q15. In a bull-case scenario, nickel could rise to $20k/t. We believe this could trigger restocking and base price increases. Conversely, we remain more cautious on the EU carbon steel sector as it continues to suffer from overcapacity and we expect falling iron ore prices (to $80/t in 2015E), which pose a headwind.
Raising stainless steel estimates
We raise EBITDA estimates 15%/4% in 2014/15E on restocking volumes and small base price increases in EU. Inventories are currently low.
Aperam: Up to Buy, onto Conviction List
APAM is the No.2 EU stainless company by capacity and well positioned on our IP framework. We like the (1) leverage to a Europe recovery, (2) valuation and improving returns, and (3) evolving commodity tailwinds. Onto the Conviction Buy List with a new 12m PT of €17 (€11.50).Trades at a 41% EV/EBITDA discount to Acerinox on 2015E.
Buy VOES (CL), Salzgitter; Sell Kloeckner
VOES remains a CL Buy where we continue to see the benefit of investments resulting in higher returns in the LT. Progress on the Salzgitter 2015 restructuring plan should continue to be a positive catalyst for SALZ. We continue to see scope for Bloomberg consensus downgrades in Kloeckner as we expect steel prices to decline through 2014 along with iron ore. We upgrade SSAB and Ruukki to Neutral (from Sell).
Risks:
Policy developments in Indonesia; steel imports