Cement &Steel Sector:Improving sentiment

Cement and steel prices supported by seasonal demand and improved construction activities. The cement and steel sectors have rallied for the past few weeks. We believe this was a result of improved construction activities from government projects and property investment on a MoM basis. China posted in-line 1Q16 economic data, with its GDP growing 6.7% YoY to RMB15.9 trillion. Property investment growth quickened to 6.2% YoY in 1Q16 as well. Area of property sold in 1Q16 grew 33.1% YoY compared with 28.2% in 2M16.

    Cement prices supported by government projects and discipline among producers. Cement prices have increased gradually after the CNY holiday mainly due to government projects kick-off in the construction season and improved demand from property projects. However, the YTD price hike has been more regional, with around RMB30-50/t increase in the east region, followed by the central south region and the southwest region. We believe price recovery should continue in the coming weeks, taking advantage of seasonal demand and improved sentiment. Property demand remains the biggest swing factor for cement demand in 2016, in our view.

    Steel prices backed by improving demand from construction and manufacturing activities. Unlikely cement’s modest rally, steel prices have staged a strong rebound, mainly due to 1) improving demand from construction and manufacturing activities on a MoM basis, 2) speculative buying on demand outlook and supply-side reform, and 3) social inventory being close to historical low. The rally of steel prices has hindered the government’s supply side reform. Around 35mtpa of steel capacity either resumed production or are scheduled to re-ramp in the coming months. The production re-ramp could lead to lower profitability for steel mills. In terms of downstream demand, we are still more positive on flat steel product demand compared with long steel products, as demand for the former is more stable, led by YTD passenger car sales up 6.9%.

    Prefer cement to steel, but buy selectively. We prefer cement to steel mainly due to production discipline and strong price coordination in concentrated markets. We believe the steel price could test its strength in June mainly due to steel mills’ re-ramp and the coming off-season. We maintain Market Perform rating on both sectors. Conch (914.HK) is our top pick on improving construction activities in peak season. The company should be the major beneficiary of cement price hike in China.