With US, Russian and Asian steel stocks up strongly (20-60%) since March, driven by sharp short covering in the US due to M&A activity, positive local factors, better than expected 1H14 results, and consensus upgrades, the global sector is back close to 4Q13 highs. However, macro tail risks from the EU as well as China growth concerns suggest the best could be over, with less exciting performance ahead.
Global steel demand growth slowed from 9% YoY in 2H13 to 3.4% YoY in 1H14, as first China and then EU offtake disappointed. While we expect a modest pick-up in 2H14 to result in FY14 growth of 4-5%, risks remain and supply growth is still ample, precluding the need for restocking until global growth accelerates.
On a 12-month forward EV/EBITDA of 6.7x, the global sector is modestly attractive although constrained by growing risks and strong recent performance. We remain positive, but recommend investors focus on individual value and rerating opportunities, rather than a broader sector view.