Karachi, November 26, 2021 (PPI-OT): Pakistan Steel: Upbeat demand keeping scrap and copper prices robust

International scrap/copper prices have increased by 11.0%/11.1% since Oct’21 to currently hover around US$488/9,932/ton compared to FYTD avg. of US$473/9,485/ton amid power shortages and supply concerns which caused smelters to go offline from Chile to China.

Impressive Chinese export growth in Oct’21(+27.1%YoY) to US$300.2bn has counterbalanced some of the pressure mounting on Chinese local manufacturers from emergence of enormous power shortage, supply-side disruptions and reappearance of covid-19 cases in China.

Local rebar prices have increased by 9.7%MoM to PkR195-197K/ton in Oct-Nov’21 amid strong retail demand in construction sector (both north and south). A sign of considerable pricing power local manufacturers exhibits which was fairly reflected in 1QFY22 results of long steel manufacturers (GMs: 17.5% in 1QFY22 vs 13.4% in 1QFY21, up 4.1ppt).

In light of robust earnings in 1QFY22 on the back of higher rebar prices, MUGHAL and ASTL have performed well, up 4.8% in Nov’21 compared to KSE-100 +0.6% in Nov’21, an outperformance of 4.2%. We prefer ASTL (TP: PkR58/sh, 38.1% upside) and MUGHAL (TP: PkR140/sh, 49% upside) with stocks currently trading at FY22 P/E of 5.14x/5.0x while on PEG basis, ASTL and MUGHAL are trading at 0.19x/0.16x.