Worst over for local steel industry, stable prices seen

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 end-September 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 (Highway), MRT2, MRT3, SUKE (Sungai Besi-Ulu Kelang Elevated Expressway), DASH (Damansara-Shah Alam Highway), EKVE (East Klang Valley Expressway), BRTs (bus rapid transit) and mega developments such as BBCC (Bukit Bintang City Centre), KL118, TRX (Tun Razak Exchange) 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.