More headwinds for Malaysian steel sector
Declining demand, ongoing trade wars to impact the industry until 2019
PETALING JAYA: Changes in global trade policies, tepid global demand and cost issues are expected to continue to disrupt demand for steel from Malaysia, negatively impacting the sector this year and next.
One good news for the sector, however, is the exclusion of building materials and construction services from the Sales and Services Tax (SST), according to MIDF Research.
In a report, the research house said recovery for the steel sector will be slower than expected, due to more headwinds from the ongoing trade wars.
“Currently, street has priced-in the risk from trade wars such as tariff imposition and duty order from local steel exporter for products bound for the US and Europe.
“On the other hand, China’s demand for steel is shaky, coupled with the slump in their construction industry,” it said.
China’s manufacturing sector takes up to 360 million tonnes of steel annually, close to 60% of the country’s annual consumption.
However, demand is expected to decline due to China’s environmental health and occupational safety policies.
Global steel demand is expected to be lackluster, growing to 1,616.1 million tonnes, or 1.8% year-on-year in 2018, and to 1,626.7 million tonnes in 2019, representing a 0.7% increase.
“This means less demand for export for the local steel mill. Most of the local companies are affected by unwavering overhead costs and operation expenditure making the sector unattractive,” it said.
On the SST, the research house noted that the exclusion for building materials and construction services from the tax will give the sector a much needed breather.
The sector has been impacted due to the cancellation and scaling down of several mega infrastructure projects by the government.
“SST will enable steel sector to maintain its product supply to construction sector without any additional cost,” MIDF Research said.
Maybank Investment Bank (IB) Research, in a report on Ann Joo Resources Bhd, noted that the steel player’s share price has fallen 46% year-to-date.
It lowered its FY18-FY20 earnings per share forecasts by 3%-13% on expectation of weaker demand in the second half (H2) of 2018, and higher electricity cost from H2’18 onwards.
It however, has a “buy” call on the counter. “We think the stock is oversold with its 12-month rolling forward price earnings ratio at six times,” it said.
The research house added that despite the import tariff in the US, the international average selling price of steel has remained relatively stable between May and July 2018, indicating that the import tariff does not tilt the global demand-supply balance.
It noted that even if the US maximises its local steel plant capacity utilisation to 97% in order to substitute imports, the additional supply from US could be offset by China’s plan to cut steel capacity in 2018.