EUR 150.00 For Business Accounts Only

Stalprodukt: Results improvement likely ahead

We reiterate our BUY recommendation for Stalprodukt and trim our FV to PLN 611 per share from PLN 687, mainly on the recent underperformance of zinc spot prices and the lower than expected TCRC benchmark set for 2018 (USD 147 vs USD 160). Nonetheless we still like STP because of: 1) strong cash generation enabling preparation for Olkusz-Pomorzany closure and at the same time paying out a substantial dividend (we forecast DY in 2019 above 7%), 2) synergies between the recently acquired Frydek-Mistek and STP’s electrical steel segment which may kick in from 2H18 on, 3) mulled mine extension in Laski mining area, and 4) more upbeat prospects regarding hollow sections and profiles as the European Commission has launched an official enquiry into steel imports which we believe may spur prices. We also count on some kind of respite from the recent dire zinc situation as: 1) 3M-spot backwardation appeared again on LME and SHFE, 2) official inventories are still at their lowest levels in 10 years, 3) most inventories are single-handedly held in remote New Orleans warehouses, and 4) sustained low spot TC rates indicate that supply is falling short of zinc concentrate demand for the moment. As for electrical steel, we would not overestimate the US-China tariffs’ effect on European prices. According to our investigations, US GOES imports are only 30-40Kt year (1-2% of the global market), mostly from Japan, and the majority of GOES ends up in the USA in the form of finished cores or transformers which are not subject to tariffs. Indeed what we see now on European GOES market is electrical steel price picking up in the conventional sub-segment STP currently operates in.