Steel sector
Maintain neutral: The latest numbers from the World Steel Association confirmed our worries about the global steel industry. Global steel production was 1.53 billion tonnes in 2011, up by only 6.8% compared with 15% year-on-year in 2010. Although steel production in China rose by 4.6% in December to 52.2 million tonnes, it was still 13% lower than the peak in May 2011 of 60.2 million tonnes.
The world’s steel utilisation rate also trended lower at 73.4% in November 2011, the lowest since April 2011. We believe the unresolved European debt crisis coupled with a slower property market in China are among the factors that led to the weakening global steel demand. As these risks are likely to persist in the foreseeable future, we expect the weakening demand trend to continue for the rest of the year.
Local growth in steel demand continues to be driven by ongoing construction projects.
We estimate about RM63 billion in total project value under the Economic Transformation Programme (ETP) and 10th Malaysia Plan will be awarded in 2H12. This should boost demand for steel products this year.
Among the projects are the Klang Valley MRT Sungai Buloh-Kajang Line (RM20 billion), Gemas- Johor Baru double tracking railway (RM8 billion), Menara Warisan (RM5 billion), River of Life (RM4 billion), KL International Financial District (RM26 billion).
China is the biggest consumer of iron ore, coal and copper. The country is also the biggest steel producer, accounting for 45% of world steel production. According to our economist, China is still addressing inflation by tightening lending and curbing investment to prevent overheating and inflation.
More importantly, China’s government continues to curb the residential real estate market, thus bringing down its home prices. As a result of the tightening policy in the property market, China’s steel millers have faced overcapacity, which dragged down steel prices.
We believe there is a possibility that China’s oversupply situation may lead to cheap imports in Malaysia. With steel demand in China staying sluggish, we would not be surprised if there are elements of “dumping” in China’s export strategy moving forward.
The presence of cheap imports will adversely impact local steel players’ earnings.
The prices of upstream/upper-midstream steel products (billets, steel bar, and wire rod) are still depressed. Billet and steel bar prices are now trading at 7.4% and 8% below their one-year historical average prices. In addition, prices of scrap metal, the raw material for steelmaking, have rebounded after the huge decline since September 2011. This means that the margins of billet and steel bar producers are likely to narrow, potentially causing steel producers to report a net loss in the upcoming quarterly results.
Prospects are better for steel millers using iron ore as their feedstock, compared with those using scrap metal. Indeed, the spread between long steel product (billet) prices and iron ore has widened to US$499 (RM1,517) per tonne from US$475 two months ago.
Currently, most Malaysian steel millers are using scrap metal as their feedstock for steelmaking, except for Ann Joo Resources Bhd.
In October 2011, the group pre-commenced its mini integrated blast furnace. With the blast furnace in place, Ann Joo can flexibly switch between scrap metal or iron ore (according to market conditions) for its steel manufacturing. We have a “neutral” call on Ann Joo with a target price of RM1.78.
So far, the share prices of steel counters under our coverage — Lion Industries Corp Bhd, Kinsteel Bhd and Ann Joo have outperformed the KLCI. This was due to the short rally prior to Chinese New Year. Although we are positive on local steel, we do not expect the prices of steel stocks to recover significantly for the rest of this year as industry fundamentals are still weak. Steel product prices have yet to recover while raw material prices are trending higher.
We reiterate our “neutral” call on both Kinsteel (target price: RM0.51) and Ann Joo (TP: RM1.78) and “sell” call with an unchanged TP of RM1.14 on Lion Industries. — MIDF Research
Maintain neutral: The latest numbers from the World Steel Association confirmed our worries about the global steel industry. Global steel production was 1.53 billion tonnes in 2011, up by only 6.8% compared with 15% year-on-year in 2010. Although steel production in China rose by 4.6% in December to 52.2 million tonnes, it was still 13% lower than the peak in May 2011 of 60.2 million tonnes.
The world’s steel utilisation rate also trended lower at 73.4% in November 2011, the lowest since April 2011. We believe the unresolved European debt crisis coupled with a slower property market in China are among the factors that led to the weakening global steel demand. As these risks are likely to persist in the foreseeable future, we expect the weakening demand trend to continue for the rest of the year.
Local growth in steel demand continues to be driven by ongoing construction projects.
We estimate about RM63 billion in total project value under the Economic Transformation Programme (ETP) and 10th Malaysia Plan will be awarded in 2H12. This should boost demand for steel products this year.
The RM4 billion River of Life project in Kuala Lumpur should boost demand for
steel products this year.
steel products this year.
Among the projects are the Klang Valley MRT Sungai Buloh-Kajang Line (RM20 billion), Gemas- Johor Baru double tracking railway (RM8 billion), Menara Warisan (RM5 billion), River of Life (RM4 billion), KL International Financial District (RM26 billion).
China is the biggest consumer of iron ore, coal and copper. The country is also the biggest steel producer, accounting for 45% of world steel production. According to our economist, China is still addressing inflation by tightening lending and curbing investment to prevent overheating and inflation.
More importantly, China’s government continues to curb the residential real estate market, thus bringing down its home prices. As a result of the tightening policy in the property market, China’s steel millers have faced overcapacity, which dragged down steel prices.
We believe there is a possibility that China’s oversupply situation may lead to cheap imports in Malaysia. With steel demand in China staying sluggish, we would not be surprised if there are elements of “dumping” in China’s export strategy moving forward.
The presence of cheap imports will adversely impact local steel players’ earnings.
The prices of upstream/upper-midstream steel products (billets, steel bar, and wire rod) are still depressed. Billet and steel bar prices are now trading at 7.4% and 8% below their one-year historical average prices. In addition, prices of scrap metal, the raw material for steelmaking, have rebounded after the huge decline since September 2011. This means that the margins of billet and steel bar producers are likely to narrow, potentially causing steel producers to report a net loss in the upcoming quarterly results.
Prospects are better for steel millers using iron ore as their feedstock, compared with those using scrap metal. Indeed, the spread between long steel product (billet) prices and iron ore has widened to US$499 (RM1,517) per tonne from US$475 two months ago.
Currently, most Malaysian steel millers are using scrap metal as their feedstock for steelmaking, except for Ann Joo Resources Bhd.
In October 2011, the group pre-commenced its mini integrated blast furnace. With the blast furnace in place, Ann Joo can flexibly switch between scrap metal or iron ore (according to market conditions) for its steel manufacturing. We have a “neutral” call on Ann Joo with a target price of RM1.78.
So far, the share prices of steel counters under our coverage — Lion Industries Corp Bhd, Kinsteel Bhd and Ann Joo have outperformed the KLCI. This was due to the short rally prior to Chinese New Year. Although we are positive on local steel, we do not expect the prices of steel stocks to recover significantly for the rest of this year as industry fundamentals are still weak. Steel product prices have yet to recover while raw material prices are trending higher.
We reiterate our “neutral” call on both Kinsteel (target price: RM0.51) and Ann Joo (TP: RM1.78) and “sell” call with an unchanged TP of RM1.14 on Lion Industries. — MIDF Research
