Will iron ore affect stocks again in the second half? – Money Times

2023 will not be easy for Mining that it steel industryWhich suffered from high fluctuations in prices Iron ore in Asian markets.

The steel raw material, which peaked at $130 a tonne, has undergone a strong correction since the beginning of the year, as the market has reconsidered assumptions (considered overly optimistic and even unsustainable by some) for the pace of economic activity recovery in China.

Weaker data from the world’s second-largest economy dumped a bucket of cold water on those who counted on a longer run in iron ore. At the worst time of the year, the commodity fell to sub-$100 levels as traders weighed the scenario of weak demand and the Chinese real estate sector struggling to show clearer signs of improvement without additional stimulus from the government.

It is no coincidence that Brazilian mining and steel companies, which are highly exposed to iron ore, have followed a sharp stock market correction in recent months. a Yes (VOUCH3), and even featured among the top five biggest falls on Ibovespa in the first half.

The question that remains from now on is: Is the economic downturn coming to an end?

Doubts remain

In a report released last month, the Goldman Sachs Warns that the market is entering a turning point, to the oversupply phase in the second half. In analysts’ assessment, in the second half, iron ore prices should average $90 per ton.

Regarding the factors that should lead to an increase in supply in the market, the bank cites a stronger supply environment, in addition to the global demand scenario for steel “Increasingly suppressed” by the downturn in China’s real estate market and headwinds in global manufacturing.

According to Goldman Sachs, although there are expectations of new catalysts for the real estate sector, the Chinese government’s action should mitigate the decline, and not serve as an impetus for a major recovery in the short term.

to genetic investmentwhich was already drawing attention to the speculation in iron ore prices and suggesting an overreaction in the market, the view regarding China ranges from pessimistic to neutral.

According to analyst Igor Guedes, the main thesis for the brokerage firm is a post-Covid reopening of China driven by services, not goods.

This can be seen in the recent manufacturing activity figures of the Asian country. This week, it was reported that manufacturing activity in China is slowing, with Industry Purchasing Managers Index (PMI) The Caixin/S&P Global Index fell from 50.9 in May to 50.5 in June, indicating marginal expansion. It should be noted that 50 separates growth from contraction.

“In our minds, the consumer is eager to consume after the epidemic is isolated. […] Looking at China, the appetite is still related to services,” says Guedes.

How are VALE3, CSNA3, CMIN3, USIM5 and GGBR4?

Even in assessing a less encouraging scenario for the mining and steel sector, Genial recognizes that recent pessimism has been “overdone”, especially for Vale.

Genial says Vale has a mature thesis and is known to be one of the stock exchange’s “cash cows” – i.e. good motivation for earnings.

“As far as it makes sense Vale would fall the most [devido à sua exposição ao minério de ferro], gave the market also exaggerated. Vale is still a very good company. You will continue to pay profit return [rendimento de dividendos] Very interesting,” Guedes argues.

The analyst believes that the worst-case scenario seems to be behind us. He says the expectation is that China will start to improve because of interest rate stimulus.

In case CSN (CSNA3), there are dynamics associated with the company’s history (leverage, plant logistics) that preclude making a better recommendation beyond ‘Neutral’ at present.

The outlook for the mining holding arm, CSN Mineraçao (CMIN3), it’s better. Guedes assesses that investor confidence regarding the thesis returns in 2023.

actually Usiminas (USIM5) in the event of working capital pressure due to the Blast Furnace 3 renovations, which prevents a stock buy recommendation.

visualization with Gerdau (GGBR4) Different. Genial sees competitive advantages for the steel company, citing geographic diversification (exposed to the business division within wewhich should start reaping the benefits of the trillionaire infrastructure package endorsed by President Joe Biden) and the production process, with more than 70% of production powered by an electric furnace using scrap, which creates a more favorable dynamic, especially in Brazil).

Genial has a Buy recommendation for Vale and Gerdau. Usiminas, CSN and CSN Mineração are rated “Neutral” – the latter more because the broker believes it is too early to change the rating. According to Guedes, the mining company needs to deliver positive data and regain investor confidence after the recent revisions of guidance.