Upbeat on flat steel, aluminum space
KUCHING: Analysts are optimistic about the flat steel and aluminum industries but they retained an overall ‘neutral’ call on the building materials sector, with a bearish view on the long steel industry’s prospects.
Kenanga Investment Bank Bhd’s research team (Kenanga Research) said it maintained its ‘neutral’ stance, with caution over the recent rally on long steel counters due to the emergence of the Alliance Steel in 2018 with its massive capacity that could cap earnings prospects despite the recent rally in the global steel commodity.
“We anticipate local rebar demand to pick up from higher construction activities in 2H21. However, Alliance Steel’s massive 3.5 million tonnes capacity introduced in 2018 would cap prices from rising substantially, in our view.
“Against domestic long steel consumption of 5.0 million to 6.5 million tones per annum, Alliance Steel’s huge 3.5 million additional capacity means that a surge in long steel demand is needed to materially lift up local long steel prices.
“Moreover, Alliance Steel’s new capacity is also more cost effective against domestic long steel producers (Annjoo, SSteel, Masteel, Lionind) – allowing them to undercut selling prices to gain market share, if necessary,” the research team opined.
On the other hand, it highlighted bright spots in the steel industry stemming from the flat steel and aluminum segments.
While most business are still reeling from the Covid-19 crisis, it noted that its flat steel coverage Ulicorp was one of the rare ones which actually benefitted from it.
“Due to the pandemic, many of Ulicorp’s smaller competitors which mushroomed since FY17 did not manage to pull through due to a confluence of factors such as cash flows issues stemming from the lockdowns which stifled delivery, and lack of raw material supply (cold rolled coil) which prevented them from meeting client orders.
“Because of this, Ulicorp was able to pick up the unfulfilled
orders by their competitors – which allowed them to gradually regain their pricing power and market share,” it said.
Besides the lower competition, it noted Ulicorp’s internal operational has become more efficient as its hot dip galvanisation unit had overcame the operational hiccups faced back in FY17 when the unit just commenced operations coupled with a leaner workforce of more than 700 workers compared with more than 1,000 in FY17.
“Also, due to the increased orders as economies gradually rebounded back from Covid-19 crisis, we note that its hot dip plant is running 24/7 compared with the 12-hour shifts previously,” it said.