Worst over for lo­cal steel sec­tor, sta­ble prices seen

> China’s move to re­duce glut, Malaysia’s safe­guard mea­sures will im­prove out­look: Ke­nanga Re­search

The Sun (Malaysia) - - SUNBIZ -

PE­TAL­ING JAYA: Ke­nanga Re­search be­lieves the worst is over for the steel sec­tor, fol­low­ing planned pro­duc­tion cuts by China.

In a re­search note last Fri­day, it said it is pos­i­tive on the cut­ting mea­sures in the long run as there will be more sta­ble steel prices from China due to re­duc­tion in steel sup­ply and ex­ports.

Re­cently, the Chi­nese govern­ment an­nounced planned ca­pac­ity cuts of 45 mil­lion tonnes in 2016 to ad­dress the over­sup­ply in the in­dus­try.

With the newly im­ple­mented safe­guard mea­sures, Ke­nanga Re­search be­lieves that it is highly un­likely for lo­cal steel re­in­forc­ing bar (re­bar) prices to see a low of RM1,450 per tonne again as China play­ers will have to ex­port steel at prices even lower than in FY15, which had caused US$10 bil­lion (RM41.5 bil­lion) in losses for the over­all steel in­dus­try in China.

The Malaysian govern­ment an­nounced safe­guard mea­sures in the form of du­ties of 13.9% for im­ported steel coils and 13.4% for im­ported re­in­forced steel bars re­cently.

Be­sides that, the re­search house said China steel re­bar prices have re­cov­ered to be­tween RMB2,500 (RM1,556) and RMB2,600 lev­els due to ca­pac­ity cuts in China. As of endSeptem­ber 2016, lo­cal steel re­bar prices traded at a range of RM1,700 to RM1,850 per tonne.

Ke­nanga Re­search be­lieves lo­cal steel prices will be more sta­ble and are likely to trend up­wards in FY17 given the re­cent im­ple­men­ta­tion of safe­guard mea­sures on re­bars and wire rods as well as China’s ini­tia­tive to cut the over­ca­pac­ity of steel. This will then pro­vide lo­cal steel millers of long steel prod­ucts an im­proved earn­ings out­look.

In FY15, lo­cal steel re­bar prices saw a low of RM1,450 per tonne due to China ex­port­ing steel re­bars at ex­tremely low prices, caus­ing steel play­ers in Malaysia to reg­is­ter losses.

Ann Joo Re­sources Bhd was par­tic­u­larly badly af­fected with a core net loss of RM120 mil­lion on the back of a 23.2% de­crease in sales.

In first half 2016, Ann Joo out­per­formed peers, reg­is­ter­ing core net profit mar­gins of 6.7%, mainly due to its cost ef­fec­tive­ness in pro­duc­ing iron through their blast fur­nace – elec­tric arc fur­nace (EAF) hy­brid tech­nol­ogy – whereas other peers in the lo­cal mar­ket are only us­ing EAF.

Ke­nanga Re­search noted that Ann Joo, in ad­di­tion to be­ing cost ef­fi­cient, will be the big­gest ben­e­fi­ciary of the safe­guard mea­sures as all its fin­ished steel prod­ucts are long prod­ucts (wire rods and re­bars).

Ke­nanga Re­search is main­tain­ing its “neu­tral” view on the build­ing ma­te­ri­als in­dus­try de­spite be­ing pos­i­tive on the steel and alu­minium sec­tors as the mar­ket weigh­tage of its neg­a­tively weighted ce­ment sec­tor is large.

“We are an­tic­i­pat­ing up­com­ing in­fra­struc­ture pro­jects i.e. Pan Bor­neo, MRT2, MRT3, SUKE, DASH, EKVE, BRTs and mega de­vel­op­ments such as BBCC, KL118, TRX and Ban­dar Malaysia to spur de­mand within the con­struc­tion steel sec­tor,” it said.

How­ever, Ke­nanga Re­search ex­pects the ce­ment sub-sec­tor to re­main weak due to high ex­cess ca­pac­ity from the ad­di­tional 16% new ca­pac­ity, caus­ing in­tense price com­pe­ti­tion be­tween ce­ment man­u­fac­tur­ers.

Alu­minium’s out­look, mean­while, is likely to im­prove on ris­ing trans­port and con­struc­tion de­mand and in­dus­try con­sol­i­da­tion.

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