Macquarie Capital Securities Ltd last week downgraded its investment ratings for Taiwan’s steel sector, citing the government’s planned opening to Chinese steel imports.
“The import policy risk will emerge as a substantial headwind for local steel mills in 2014,” Macquarie’s Taipei-based analysts David Liao (廖偉志) and Corinne Jian (簡秋萍) said in a research note issued on Wednesday.
The brokerage’s warning comes as Taiwan considers easing restriction on imports of upstream steel products from China as part of Taipei’s follow-up trade negotiations with Beijing over the Economic Cooperation Framework Agreement signed in 2010.
Macquarie said about 50 percent of steel products on Taiwan’s import restriction list are from China, which require case-by-case approval by the Ministry of Economic Affairs. However, such protections might weaken this year, as the government is set to negotiate a cross-strait trade in goods agreement, the firm said.
In the note, Macquarie revised its equity recommendation for China Steel to “underperform” from “neutral” as well as downgraded Tung Ho Steel Enterprise Corp (東鋼) and Feng Hsin Iron and Steel Co (豐興) to “neutral” from “outperform.”
However, the brokerage remains positive on downstream maker China Metal Products Group (CMP, 勤美), saying that the downstream sector would welcome more Chinese imports.
China Steel shares moved 0.77 percent lower last week, closing at NT$25.85 on Friday, compared with the TAIEX’s 1.04 percent increase in the week. Over the same period, Tung Ho’s shares fell 1.7 percent to end at NT$26.05 on Friday. Feng Hsin stayed unchanged at NT$51.3, while CMP rose 1.61 percent at NT$37.85, Taiwan Stock Exchange data showed.
Last week, Taiwan Steel & Iron Industries Association chairman Tsou Jou-chi (鄒若齊) visited Industrial Development Bureau Director-General Wu Ming-chi (吳明機) to express the association’s concern over China’s trade barriers.
During the meeting on Wednesday, Tsou, who is also chairman of China Steel Corp (中鋼), the nation’s largest integrated steelmaker, asked the government to help increase local steel exports to China and demanded that China provide a level playing field for local firms, according to a bureau statement.
“Combining the strengths of Chinese export rebates on steel products and cheaper Chinese prices, we expect steel imports from China to rise if import restrictions are removed,” Liao and Jian said in the note.
Macquarie said the potential change to restrictions on Chinese imports could affect prices of Taiwan’s plates, rebar and rods, as well as other products.
To mitigate the potential impact, the ministry plans to issue new quality certification standards in the second quarter of this year and impose anti-dumping levies if necessary. However, Macquarie believes that protection is likely to be limited in effect.
“We anticipate the certifications will only serve as a short-term barrier if the arbitrage window between China and Taiwan remains open due to cheaper Chinese steel prices and existing Chinese export rebates of between 9 percent and 13 percent,” Liao and Jian said.
Levying anti-dumping taxes may just be a possibility, but not a certainty, the brokerage said.
“For an anti-dumping tax investigation to take place it would require proof of damage and would take time to carry out [six months or longer for investigation],” Liao and Jian said.