Steel roar­ing back in earn­ings

Cut in China’s steel ca­pac­ity does not nec­es­sar­ily trans­late to lower pro­duc­tion

The Star Malaysia - StarBiz - - Companies & Strategies - By IN­TAN FARHANA ZAINUL in­tan­zainul@thes­tar.com.my

THE lo­cal steel in­dus­try is back in vogue.

A num­ber of steel pro­duc­ers have re­ported strong earn­ings from higher steel prices, although some are still in the dol­drums. The steel in­dus­try has been in a slump the last five years, be­lea­guered from the over­sup­ply of steel prod­ucts es­pe­cially from China.

But things are turn­ing the other way now. Since last year China has sought to re­duce its steel pro­duc­tion ca­pac­ity as a means to re­duce the glut and re­duce pol­lu­tion there. The ef­fects are be­ing felt here now. Among the lo­cal steel play­ers which have recorded big gains in their earn­ings are Ann Joo Re­sources Bhd, South­ern Steel Bhd and Hiap Teck Ven­ture Bhd.

South­ern Steel, for ex­am­ple, re­turned to the black in its fi­nan­cial year ended June 30. It re­ported a profit of RM93.3mil for FY2017 ver­sus a loss of RM221.15mil for FY2016.

Hiap Teck, mean­while, en­joyed a tripling of its prof­its to RM32mil for its third quar­ter ended April 30 from a year be­fore.

The stock prices of these com­pa­nies have also done very well. Since the be­gin­ning of the year, Ann Joo’s stock gained 77.4% to RM3.68, while South­ern Steel and Hiap Teck surged 107% and 54.2% to RM2.46 and 43.5 sen.

At cur­rent prices, Ann Joo is trad­ing at an earn­ings mul­ti­ple of 10.7 times, while South­ern Steel is at 11.1 times and Hiap Teck at 13.1 times.

How­ever, is this pos­i­tive trend sus­tain­able? It should be noted that in the last five years, the in­dus­try was hit by a plunge in steel prices due to an over­sup­ply that saw some steel play­ers like Me­gas­teel and Per­waja shut­ting down op­er­a­tions.

Hence de­spite the good run for the year, in­dus­try ex­perts reckon that the road for lo­cal steel millers will be bumpy.

For one, the price of steel is de­pen­dent on China’s poli­cies over its steel in­dus­try.

“The sus­tain­abil­ity of (steel) prices are de­pen­dent on China’s poli­cies and de­mand as well as global de­mand,” says Malaysian Iron and Steel In­dus­try Fed­er­a­tion president Datuk Soh Thian Lai.

He points out that although China last year pledged to cut 150 mil­lion tonnes of ex­cess steel ca­pac­ity by 2020, the repub­lic would still have an­other 150 mil­lion of ex­cess ca­pac­ity.

“One key set­back for the steel in­dus­try is the like­li­hood of China’s mills in­creas­ing pro­duc­tion to gain prof­its. Also the ca­pac­i­ties that China are cut­ting are mainly from pri­vate mills. These mills are likely to res­tart their op­er­a­tions,” he says.

Ac­cord­ing to the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment, the global steel ca­pac­ity in 2016 was 2.38 bil­lion tonnes, of which Chi­nese ca­pac­ity stood at 1.17 bil­lion tones, with rest of the world at 1.22 bil­lion tonnes.

But although China is cut­ting its ex­cess steel ca­pac­ity, in­di­ca­tion are that this does not nec­es­sar­ily lead to lower steel pro­duc­tion there.

Last month, China based millers ramped up their pro­duc­tion, post­ing a monthly record pro­duc­tion. Their mills which in­clude the world’s top sup­pli­ers, in­creased out­put to take ad­van­tage of the rally in steel prices. They did this be­fore the ca­pac­ity cuts by the gov­ern­ment which were to be­gin this month, Bloomberg re­ported.

The re­port said that steel out­put in China climbed to 74.59 mil­lion tonnes last month, up from 68.57 mil­lion in Au­gust 2016.

China is ex­pected to cut more ca­pac­ity start­ing this month as part of the coun­try’s win­ter anti-pol­lu­tion curbs.

The Chi­nese gov­ern­ment made a com­mit­ment last Jan­uary to re­duc­ing its steel pro­duc­tion ca­pac­ity by be­tween 100 mil­lion and 150 mil­lion tonnes.

Since last year, China has also been clamp­ing down on il­le­gal steel pro­duc­ers in ef­forts to curb pol­lu­tion es­pe­cially in the Bei­jing area.

Since China’s pledge in 2016, steel prices have sta­bilised glob­ally and, had given the much needed breathing space for lo­cal steel play­ers.

“In gen­eral the steel in­dus­try in Malaysia is re­cov­er­ing from the worst sce­nario hav­ing been flooded with cheap im­ports es­pe­cially from China,” Soh says.

He ex­pects steel prices to sus­tain its mo­men­tum on the back of steady de­mand, plant main­te­nance by ma­jor steel millers, as well as higher iron ore and coal prices.

The do­mes­tic price of long steel prod­ucts to date has surged to about RM2,600 per tonne com­pared with RM2,200-RM2,400 per tonne in Jan­uary this year.

Soh says de­mand for steel lo­cally has been pos­i­tive on the back of ro­bust eco­nomic growth in the first half, which was boosted by con­struc­tion projects.

Sus­tain­ing price in­crease

“In­fra­struc­ture de­vel­op­ments in progress es­pe­cially in the fourth quar­ter would sus­tain the in­crease in steel prices,” he says.

In ad­di­tion, the gov­ern­ment’s en­cour­age­ment and pro­mo­tion of the in­dus­tri­alised build­ing sys­tem, a re­newed push on the “buy Malaysian prod­ucts first” pol­icy, es­pe­cially in the con­struc­tion in­dus­try, and high-im­pact projects, will all help bol­ster the do­mes­tic steel in­dus­try.

Soh says that cur­rent lo­cal steel pro­duc­tion ca­pac­i­ties are suf­fi­cient to take up any surge of de­mand.

“The de­mand for steel is still not ex­ceed­ing sup­ply. Steel com­pa­nies have enough ca­pac­i­ties to over­come any up­surge of de­mand,” he says.

Glob­ally, he says that the de­mand of steel from China and glob­ally is grow­ing at 7% and 1.5 %, re­spec­tively.

“If the de­mand is still steady in China, the in­ter­na­tional price could be sus­tained un­til year end, and re­cently many big steel mills are hav­ing their yearly main­te­nance, which could put pres­sure on the sup­ply side,” Soh says.

Mean­while, an an­a­lyst says that the re­cent rally in steel stocks are driven by lower steel out­put ex­pected from China as the win­ter is com­ing.

“Ca­pac­ity cuts es­pe­cially for plants lo­cated in Bei­jing are ex­pected to kick in as the win­ter heat­ing sea­son started in Novem­ber,” the an­a­lyst says.

The on­go­ing cuts in China steel pro­duc­tion as well the im­po­si­tion of safe­guard du­ties by Malaysia for im­ports from China has shown pos­i­tive sign to lo­cal steel play­ers.

In April, the Malaysian gov­ern­ment had de­cided to ex­tend safe­guard du­ties on sev­eral steel prod­ucts by be­tween 11.9% and 13.4% for three years.

“The safe­guard mea­sures on the steel sec­tor has also led to lower China steel im­ports re­sult­ing in a sta­bilised price mech­a­nism, which would helped lo­cal steel millers to sus­tain their prof­itabil­ity,” points out the an­a­lyst.

The steel in­dus­try though is a tough one where only the strong sur­vive. Con­sider this: be­tween 2013 and 2015 when the do­mes­tic steel in­dus­try faced a global steel price slump as well as cheaper steel im­ports, lo­cal play­ers in­curred to­tal losses of up to RM2­bil. This is cer­tainly food for thought for those bet­ting on lo­cal steel millers rid­ing on the cur­rent up­trend in the sec­tor.

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