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Resumption of production seen amid the easing of MCO

KUALA LUMPUR: Earnings of cement companies are expected to recover in the second half of this year, driven by the resumption of production amid the easing of the movement control order (MCO).

UOB Kay Hian Research expects losses to narrow in the third quarter of this year and profitability to return in the fourth quarter as utilisation rates, which have improved, are likely to normalise in the fourth quarter.

“By the end of 2020, utilisation rate is expected to be at pre-covid-19 levels, above 70%, for most of the cement companies in Peninsular Malaysia,” the research house said.

Meanwhile, it forecast the outlook for cement companies to be positive, with bulk cement average selling prices (ASPS) of RM245 per tonne by year-end compared with the current price of RM230 per tonne for industry leaders and RM210 per tonne for smaller producers.

“We view this development positively as bulk cement ASPS did not decline further post-mco,” it said.

Moving forward, UOB Kay Hian Research expects bulk cement ASPS to firm up by RM10 to RM20 per tonne towards year-end, which will bring bulk cement prices to RM240-RM250 per tonne, along with the gradual resumption of mega and infrastructure projects.

“This marks a recovery post-mco, with ASPS having eased to RM230 per tonne in March 2020 from its peak of RM250 per tonne in February 2020 for leading industry players.

“We believe smaller cement producers will follow suit in raising their bulk cement prices in the third quarter to RM230-RM240 per tonne versus the current prices of RM205RM210 per tonne,” the research house said.

Besides that, it pointed out steel companies are likely to underperform in the second half of this year due to poor demand, depressed ASPS and oversupply issues.

As local steel bar prices fell by 25.2% from the peak in January 2018, the research house does not anticipate a material recovery in the second half because of weak demand and oversupply to persist.

Given that major steel plants were shut during the MCO, it expects steel demand on the domestic front to contract by 10% yearon-year in 2020.

Despite the resumption of operations in May this year, utilisation rates have remained low, below 30%, dragged by weak local steel demand.

Moreover, UOB Kay Hian Research said a slowdown in infrastructure projects would result in weaker consumption.

The steel sector is also hampered by higher raw material costs such as iron ore prices, which jumped 24.2% month-on-month to US$106.80 per tonne on June 1, 2020.

On the other hand, Malaysian Iron and Steel Industry Federation and Malaysia Steel Association have urged the government to relook at the Wenan steel project worth Rm13bil in Sarawak.

Should the project be given the green light, UOB Kay Hian Research said “the impact to the steel industry could be devastating.”

“We understand that the proposed project may have an installed capacity of 10 million tonnes, which is almost equivalent to Malaysia’s total steel consumption.

“Malaysia’s steel industry is already under intense pressure, with persistently weak demand and industry utilisation rate barely hitting 40% for both long and flat steel,” it explained.

Based on its initial timeline, the steel project, which is proposed to be located in the Samalaju Industrial Park, is expected to start construction soon.