Steel faces tough near-medium perspective
KUALA LUMPUR: Analysts observe that Malaysia’s steel sector’s near to medium outlook is still challenging, premised on the absence of anti-dumping trade action by the government.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) in a recent report said, despite a decline in raw material prices which could boost steel players’ margins, the local steel consumptionisgrowingintandem with the increase in imports from China.
Without the implementation of trade action by the government, the research firm pointed out that steel consumption will be driven by the amount of cheap import from China, therefore hampering locally manufactured steel market share.
“In fact, the falling market share has affected the steel production. We believe if the production keeps on declining, it will negatively affect the steel players’ earnings as they have certain fixed costs to bear, regardless of any production level,” it added.
The research firm also believes, local steel players may face earnings risks towards financial year 2015 (FY15) given the uncertainty of steel prices following the potential growing steel import activities in the local market.
Of note, in January 2015, MITI announced that the anti-dumping probefoundthattheimportofsteel concrete reinforcing bars (rebar) from China and South Korea does not cause material injury to the domestic industry.
Hence, there will be no import duties imposed on rebar, of which Kenanga Research viewed negatively.
“We notice that the import volume of iron and steel has been consistently increasing since 2012. In terms of value, there was a sharp drop in import prices in mid-2012 and it has been reducing over the years, which has eventu- ally dropped below export prices since April 2013.
“Despite the weakening of the ringgit, import prices of steel bars continue to decline and remain below locally produced ones.
“Hence, we believe the impact of strengthening steel imports would mean steel rebar prices will likely be depressed further (we are considering to reduce our FY15E price assumption from RM2,000 per metric tonne to RM1,900 per metric tonne (a five per cent decline), closer to current market price of RM1,880 per metric tonne), and local steel players’ (steel bar) market share will shrink due to intense competition. This could negatively impact the steel players’ earnings,” Kenanga Research commented.
It also observed, aside from iron ore, overall raw material costs have fallen at a greater pace than global steel average selling price (ASP).
“As at year to date, raw material prices (coke and scrap) have declined by the range of 15 to 44 per cent greater than that of long steel products (billet, rebar, wire rods) prices’ decline of five to 14 per cent.
“We believe that the significant reduction in coke price will be beneficial for steel players that use blast furnace, who can ride on lower cost to record higher margins,” it said.
However, it pointed out that while there is a slight increase in iron ore price, this could be due to seasonal factor as production in year end tends to slow down during winter season.
“Hence, we believe that iron ore price will continue to drop in FY15 as mining resumes later in the year,” it opined.
Kenanga Research said, “We are now expecting the steel sector to be more challenging in the nearmedium term.
“We believe the absence of remedies from the government to curb the rising import activities of steel products could lead to continuous influxofimportedsteelindomestic market hence affecting the local steel players’ market share and depressed steel prices.
“We also believe that the booming construction activities in the local market may not help the steel industry to recover if the oversupply situation in China persists.”