Morgan Stanley | China’s reopening trade and the support for its property market has sparked a strong rally in the steel sector and in underlying commodities, leading the stocks to already discount a recovery in demand during 2023. Now there is an <8% average upside to target prices, so the risk/return is not attractive. The base scenario assumes a recovery in China in Q2’23. However the road will be bumpy, with risks of fresh waves of Covid and that the demand for metals ends up being less than is being discounted by commodity prices.
Preference for steel vs mining and for iron ore producers vs copper
Where there is a greater opportunity for rerating and greater “mispricing” is in steel, particularly Arcelor (OW). It has been left behind in the rally and will benefit from an rebound in activity in China and a possible end to the destocking of inventaries in Europe. In stainless steel, the outlook is more moderate. In spite of also being near bottom, it is more of a late cycle industry and more exposed to consumer demand which make take longer to turn around. The favourite is still Aperam (OW) thanks to its diversified business model.
