Morgan Stanley | According to Bloomberg, Acerinox stopped foundry operations at its Cadiz stainless steel plant last night and has launched a licensing plan due to high energy prices. The article flags that the company could consider leaving other parts of the plants idling, such as the hot and cold rolled mills.
We believe this move highlights the increasing energy challenges in Europe. That said, we think that Acerinox may be capable of offsetting the impact on production and profits for various reasons: 1) Acerinox Europa has been an asset with low margins and losses in the last few years. Meanwhile, the lion’s share of profits come from its US business. 2) Acerinox Europa implemented an agreement similar to a licensing in 2020 due to the pandemic, which included all staff. It allowed the personnel to adapt to the production needs at any given moment, providing significant flexibility in the current environment. 3) Acerinox Europa can bring slabs (semi-finished products) from other plants belonging to the group (especially from South Africa) or from third parties (at a higher cost and so the margin is lower). It can produce hot or cold laminated sheets, thus offsetting the decline in volumes in Europe. 4) Against a backdrop where energy prices in Europe remain high for a longer time, we see supply risks increasing for the stainless steel sector in general. And therefore the potential for a tighter internal market.
MS has a Target Price for Acerinox of 16,5 euros/share
