Global demand for steel will grow as economic conditions improve in China, the world's biggest consumer of the metal, Credit Suisse analysts said Thursday as they upgraded the industry.
Orders for steel plunged late last year as the global economic slowdown hit key customers in the automotive, construction and industrial equipment markets. Steel companies have cut production drastically in recent months, and prices have tumbled from record highs in mid-2008.
China had helped fuel a surge in global demand before the downturn. Now China's economy is recovering, with loan and infrastructure investment growing at 27 percent annually, new home sales rising and manufacturing expanding, Andrew Garthwaite and other Credit Suisse analysts wrote in an investor note.
"We are very confident of the recovery in China," which accounts for 35 percent of the world's steel demand, they wrote. "Nearly all data points have turned."
They wrote that "a huge proportion" of steel is now trading below the cash cost, and that greater production cuts are inevitable to bring supply in line with falling demand. Production outside China — the world's largest steel maker — is down 37 percent year-over-year and has fallen to its lowest level since 1967, the analysts wrote.
Investors have doubted the steel industry's prospects based on fears that higher Chinese export subsidies would undercut global prices, with a consensus estimate of Chinese demand growth of 3 percent.
"In our opinion, this is far too low if China's real investment growth will be up 9 percent this year ... and China is no longer a net steel exporter on the latest data," they wrote.
The analysts, who upgraded the steel sector from benchmark to overweight, wrote that favored inexpensive steel stocks included Posco, ArcelorMittal, ThyssenKrupp and Nucor.