From the FT's Lex blog
Steely. A word often associated with cold, dispassionate, hardened, and imperturbable. Not so the industry’s investors: as China’s building boom has slowed, they have skedaddled, leaving the share prices of some of Asia’s biggest producers languishing well below book value. That is hard to justify.
At first glance, it does look grim. Mills in China, producer of nearly half of all steel and consumer of a roughly similar amount, are turning to pig farming, among other ventures, for profits. Collectively, the industry has turned a profit of nearly $5-billion in the first quarter of 2011 into a $600-million loss this year, even as production reaches record levels, China Iron and Steel Association data shows.
That does not however fully explain why giants such as Posco of Korea, Nippon Steel and China’s Baoshan and Angang trade at an average three quarters of book value - about half their 10-year average. That puts companies where property, equipment and stock account for more than half of book not far above liquidation value.
There are of course reasons why Asian steel producers’ shares have fallen about 30 per cent in the last year - underperforming the broader market by a fifth. One is the inevitable hangover following a decade-long party at which investors were lulled into believing that stunning boom was the norm. Another is China’s own growing output (and pig-farming implies a willingness to subsidise unprofitable production), which has kept pace with its demand growth (an average 15 per cent a year for the last decade). Since demand outside China only crawled higher, any home chill was going to be brutal.
But there are reasons to think the worst is over. Stockpiles are slowly shrinking and prices are steadying. And China’s appetite has not collapsed: demand should still grow about 6 per cent this year. Industry sentiment is improving, but gradually, not wildly, suggesting some welcome realism among producers. Time perhaps for some valuation realism among investors.