Summary: The steel/nonferrous metal sector faced difficulties in 2015 in terms ofcommodity prices, industry conditions and, on a company level, operating results. In2016, however, numerous firms enjoyed an earnings rebound on a widening steel spreadenabled by supply controls and subsequent price hikes. In 2017, we advise monitoringwhether: 1) the US increases infrastructure spending, which should add inflationarypressure; 2) China expands fiscal spending and quickens restructuring; and 3) US DollarIndex (USDX) and London Metal Exchange Index (LMEX) both keep rising.

US infrastructure plan to add inflationary pressure: Supply controls havedriven up commodity prices in 2016; demand-driven inflation should take over in 2017.

Donald Trump’s plans for infrastructure, if implemented, should lift global demand forsteel and copper by a respective 1.6% and 1.8%, benefitting steelmakers (eg, via ASP hikeson rising raw-material cost). Posco’s ROE would rise to 0.7%pts y-y 4%. Meanwhile,rising prices of nonferrous metals should boost results of Korean players immediately.

China’s upside to enter limelight in 2H17: We expect steel/metals firms to rallybefore their earnings start to improve on anticipation of US infrastructure spending. In2H17, the market should start focusing on China, which represents 40-50% of globalmetal demand. Although demand growth may slow there next year (on the base of a realestateboom and surging auto production), overall supply-demand dynamics shouldremain similar y-y amid gradual restructuring led by state-run firms. Upside could comefrom China implementing its One Belt, One Road policy or accelerating restructuring.

USDX, LMEX to keep rising in near term: The USDX and LMEX have displayed anegative correlation since 2000, but both have risen of late on expectations of fiscalexpansion and a US tilt toward protectionism. We expect them to keep rising in the nearterm amid uncertainty over Trump’s policies, boding well for Korean steel/metals firms.

Upgrading to OVERWEIGHT: We upgrade the steel/nonferrous metal sector fromNEUTRAL to OVERWEIGHT believing shares will rally on hopes that US infrastructurespending (and subsequent inflationary environment) impact earnings of steel/nonferrousmetals companies immediately. The market in 1H17 should focus on whether USpresident elect Donald Trump follows through on his promises and in 2H17 on demandupside in China. Among large caps, we like Posco and Korea Zinc for their bright earningsoutlooks thanks to solid spreads and rising commodity prices. Among small caps, we likePoongsan and Seah Steel for benefits resulting from infrastructure spending in the US. 鑄件展-鑄件采購會-國際鑄件展-2017第十八屆廣州國際鑄件展會-巨浪展覽-The 18th China(Guangzhou )Int’l Casting product Exhibition