Latin American Steelmakers Downgraded As Profits Set To Deteriorate
February 15 2012 - 2:14PM
Dow Jones News
RIO DE JANEIRO (Dow Jones) -- Merchant bank analysts downgraded
various Latin American steelmakers Wednesday on prospects of
falling steel prices in Brazil and deteriorating profitability amid
weak first-half demand.
Now is the time for profit-taking in the Latin American steel
sector after a recent stocks rally which is set to peter out, said
analysts from Morgan Stanley and Citigroup, which both downgraded
Brazil's Gerdau SA (GGBR4.BR), Usinas Siderurgicas de Minas Gerais
SA (USIM5.BR, USZNY), or Usiminas, Companhia Siderurgica Nacional
SA (CSNA3.BR, SID) or CSN, and Latin American steelmaker Ternium
(TX).
Morgan Stanley's researcher Carlos de Alba said in a report he
downgraded the four steelmakers because "steel prices are poised to
fall" and there's little room for any further improvement in steel
stocks prices, which have risen as much as 42% from recent lows.
The analyst cut Gerdau and Ternium to equalweight from overweight
and CSN and Usiminas to underweight from equalweight.
"Risk-reward profiles have deteriorated as the shares appear
already to price in the improving Latam steel fundamentals we see
in the coming years: higher volumes driven by demand growth and
reduced raw material costs that will boost operating margins," de
Alba said. "We think (steel) prices have peaked and will decline in
coming weeks."
It's unclear how Ternium will generate an attractive return on
its expensive acquisition of a controlling stake in Usiminas, where
any turnaround by its new management will take at least two years,
according to de Alba. In addition, Gerdau's stock is currently
pricey and CSN continues to face problems expanding its iron ore
shipments which has generated concerns over capital allocations, he
said.
Citigroup analyst Alex Hacking cut Gerdau and Ternium to neutral
from buy and Usiminas and CSN to sell from neutral. Target share
prices were cut for all the steelmakers.
Hacking highlighted several near-term concerns for Latin
American steelmakers in a report. Steel share prices have rallied
without fundamental improvements, he said. First-half 2012 demand
for steel in Brazil, the biggest Latin American producer and
consumer, is looking weak and is overhung by high inventories,
meaning there's little near-term prospect of higher prices for the
region's steel mills.
"Global over-capacity has limited any sustainable pricing since
2008, and we do not anticipate any improvement in 2012," Hacking
said.
While steelmakers' margins may rise in second-quarter 2012 due
to lower raw materials costs, any advantages gained will fizzle out
later in the year due to cost inflation, according to Citigroup's
calculation.
In a report earlier this week, Morgan Stanley analyst Marcelo
Aguiar said that a combination of lower risk aversion among equity
investors and recent steel price hikes in the U.S. has brought
investor attention back to the steel sector.
However, "we do not see earnings expanding for Brazilian
companies, given a low probability of local steel price increases
near term," Aguiar said.
The Morgan Stanley analyst notes there is "skepticism" on CSN's
investment case and says that the stronger outlook for the U.S.
economy seems to be already priced into the stock at Gerdau, which
still needs to reap in any benefit from its current iron ore mining
investments.
Appointment of a new CEO at Usiminas meanwhile "reduces the
near-term visibility on Usiminas' strategy, which could act as an
overhang," said Aguiar, who expects Usiminas to report weak
earnings in fourth quarter 2011 and first-quarter 2012.
-By Diana Kinch, Dow Jones Newswires, Tel +55 21 2586 6086.
diana.kinch@dowjones.com
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