Bullish investors on Chinese steel stocks as stimulus stimulates demand

China's response to the slowdown in the economy has sparked hopes of taking advantage of steel stocks, while investments in infrastructure and real estate reinforce the industry's strongest demand drivers.
The recovery in economic data in recent weeks suggests that economic stimulus will soon focus on the relatively unpopular steel sector, which has so far been lagging behind the stellar gains observed. elsewhere in the stock market indices of the continent. A surge in local bond issues to fund roads, homes and other infrastructure increases tax cuts and other tax measures, thereby raising the gages that measure Industrial activity and credit growth.
The burst of positive statistics comes as mills are battling lower prices and rising raw material costs after Vale SA's deadly dam burst last January, putting a rocket under the iron ore market. Angang Steel Co., the nation's number three, warned last week that first-quarter profits would plummet by 78 percent. According to the latest estimates, the company is ready to make lower profits this year, as is the main steel maker Baoshan Iron & Steel Co.
Analysts did not get discouraged. Twenty of the 23 people who follow Baosteel bought their shares, Goldman Sachs topped the ratings with a goal of 10 yuan, about 30% higher than its current level.
Morgan Stanley, which prefers stocks of steel and cement among materials, said it was more optimistic this month on the construction sector in China, which accounts for 67% of steel demand.
"We are more optimistic than we were," said Yang Kunhe, an badyst at Pacific Securities Co. "The macroeconomic environment is improving and this continues to be verified by the publication of data." This impressive series was wrapped up Wednesday with first quarter beats GDP and March figures for industrial production and retail sales, as well as record steel production.
At the same time, other steel-specific indicators are sending bullish signals. Reinforcement bar stocks began to fall earlier in the construction season compared to last year, according to data from Shanghai Steelhome E-Commerce Co, while margins have been rising since the end of 2018 .
However, the concerns that have weighed on the steel sector have not disappeared. The trade war with the United States remains unresolved, even though headlines suggest that negotiators are getting closer to an agreement.
In addition, the shock of iron ore supply seems to leave much more room for maneuver, as the Chinese steel sector is not prepared for an imminent shortage that will drive up prices, according to the Steelhome chairman.
While stimulus measures are brightening the outlook for demand, steel margins will be lower this year in the absence of support measures – plant closures and production restrictions – which have pushed prices up. their highest level last summer, said Sandra Huang, an badyst at UOB Kay Hian.
At the same time, soaring iron ore costs and its impact on margins will constitute a "fundamental change" for the sector in the medium and long term, she said.
Others are more clearly bullish. "The time has come to buy steel stocks," said Yang Hua, an badyst at Zheshang Securities Co Ltd. He expects prices in the sector to increase by 20 to 30% this year, as stimulus measures improve.