Turkish Steel: Limited catalysts in 2024

Global steel prices recovering gradually: Global steel prices recovered in 4Q23, supported by rising input prices and supply cuts. This is likely to support earnings for both Kardemir and Erdemir in 4Q23 relative to 3Q23 and 4Q22. Europe HRC prices have seen a c15% increase since early October, and an upward trend can also be seen for Kardemir’s published sales prices. Our Metals and Mining team (Metals Quarterly Q1 2024, 16-Jan-2024) estimate a modest 1.7% recovery in global steel consumption in 2024e, after 2 years of contraction.

Non-property demand from China should support consumption growth while US and Europe steel demand is expected to remain muted during the year. We think domestic demand will also remain under pressure due to a high interest rate and inflation environment in Türkiye, impacting volume for end user markets. Considering the challenging domestic macro environment and muted demand outlook for key export markets, we expect limited growth catalysts for Turkish steel companies, especially in the next few quarters.


Retain Buy on Kardemir; Hold on Erdemir: We retain our Buy rating on Kardemir on valuation grounds as it’s trading at 2024e EV/EBITDA of 2.5x vs. the global steel average of 5.0x and Erdemir at 5.3x. We think this is unwarranted given Kardemir’s relatively favourable cost structure, limited FX position and leverage and the country’s need to focus on construction of new houses given the earthquake disaster last year. We estimate EBITDA/t at USD97/t for 4Q23e, and at USD125/t on average for 2024e (unchanged).

For Erdemir, we estimate EBITDA/t of USD105 for 4Q23e, improving sequentially. We cut our medium-term EBITDA/t estimate by c9% for 2024e and c5% for 2025e, mostly based on not so favourable global steel prices outlook, although volume outlook is favourable on low base of last year. We think Erdemir’s higher capex requirement (cUSD1bn for both FY23 and FY24) limits cash generation, stretching net debt, and putting pressure on the upside potential of the shares. We therefore retain our Hold rating on Erdemir.



HSBC Global Research