While Japan's iron and steel industry has had a strong start to 2003, Invesco Perpetual's Paul Chess...
While Japan's iron and steel industry has had a strong start to 2003, Invesco Perpetual's Paul Chesson believes the positive trend in the sector has run its course.
Over the year to 17 February, the Topix Iron and Steel Index has returned 15.25%, in sterling terms, compared to the general Topix Index, which has made a marginal 0.15% gain.
Chesson says a dip in supply from Japanese manufacturers and strong demand from China have been the principal factors behind the sector's strong performance so far in 2003. Steel prices had been depressed in Japan for some time, he notes. However, as supply has gradually been reduced, demand is starting to come back.
The big performers in the sector have been the blast furnaces. These, Chesson says, are very costly to set up, which is why there is such a demand from China and new Asian economies.
'As China is likely to continue to exhibit a fast growth rate, demand for commodity products will be strong going forward,' he adds.
Denis Clough, Japanese fund manager at Schroders, believes the sector has been aided by the globally resilient market for cars, particularly in the US, which uses Japanese steel in auto manufacturing.
He says the sector has performed well for two reasons: consolidation in the industry and price increases.
However, Clough adds: 'The long-term prospects for the sector are still tough, with Japan facing competition from Korea and other parts of Asia in the short term.'
Clough does not have any direct exposure to the sector, instead buying in through Japanese trading companies, which benefit from strength in commodities.
For example, his largest overweight position at present is in the trading company Mitsui.
Not only has this company benefited from the higher ore, oil and commodity prices, says Clough, it has also restructured its balance sheet and cut costs.
Chesson says prices in the sector have been strong as Japanese manufacturers have reduced their capacity.
Companies have been working together in terms of mutual supply, he points out, and have improved pricing in the sector as a result.
However, Chesson says, the sector is now looking overvalued and while a quarter is export-oriented, 75% remains dependant on the rest of Japan, where there are signs of the economy slowing again.
Chesson adds: 'From here on, the sector can only get worse and, in terms of share prices, the trend in steel has run its course.'
From the end of December 2001 to 31 January 2003, the sector made a total return of -10.43%, in sterling terms, compared to the Topix Index, which registered a loss of 22.56% over the same period.
The best-performing stock in the sub-index from the start of 2003 to 17 February has been Kanto SPL Steel, which has returned 90.33% in sterling terms.
Chesson currently has no exposure to the sector. Instead, he has a small weighting in mini-mills, which produce lower-quality steel than that produced by blast furnaces.
Topix Iron and Steel Index returned 15.25%.
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