Posted on 22 Apr 2017
A CONFLUENCE of factors impacting the steel sector could result in stronger earnings for some players while negatively impacting the outlook of others.
First is iron ore prices, which have fallen by some 30% last month. This means steel producers that use iron ore as their key raw materials should directly benefit.
Another new development in the sector is the decision by the Malaysian government to extend safeguard duties on several steel products by between 11.9% to 13.4% for three years.
In the past five years, steel producers in many parts of the world have been reeling from the effects of cheap steel imports from countries like China.
Malaysia is no different as some steel plants such as the country’s largest hot-rolled-coil steel plant, Megasteel Sdn Bhd, has ceased operations last year. Two other major steel players, including Perwaja Steel, also shut down.
This is largely due to their inability to compete with the cheap steel coming from China.
After many years of discussions, the Malaysian government decided to impose safeguard duties for rod and bar steel products last year, and had recently announced that it will extend it for next three years.
The steel manufacturers may have received renewed attention following the definitive safeguard duties for the import of bars and rods.
Among them are Ann Joo Resources Bhd, Malaysia Steel Works (KL) Bhd, Leader Steel Holdings Bhd and Southern Steel Bhd.
The duties were determined to be between 13.42% and 13.9% for the first year. They will subsequently decline to between 11.1% and 12.9% over the next two years.
Analysts say that currently, Malaysian steel products for bars and rods have lower selling prices than China, without the safeguard duty.
“The local steel players are very competitive among themselves. The current capacity could support the current local demand,” a market observer says.
Maybank IB Research estimates that the average selling prices (ASPs) of bars in China are 10%-16% higher than that of Malaysia, about RM2,100 and RM2,250 per tonne before including import and safeguard duties.
“Despite the higher steel production in China, the higher ASPs there signify strong domestic demand in China, underpinned by the government-led infrastructure spending,” it says in a recent report.
It notes that the imports of bars and rods into Malaysia have fallen significantly by 31% in January 2017 from a year ago.
An industry player reckons that the Malaysian government’s safeguard measures will help to buffer local players should there be a huge slump in steel prices following a drop in iron ore prices.
“Should there be influx of steel following a plunge in iron ore prices, the impact from the safeguards could be reduced,” he said.
He points out that the decline in the price of iron ore was because China has cut its steel production.
“China is looking to cut another 60-80 million tonnes in capacity in the next five years but their domestic demand is growing, hence we would not see huge decline in global steel prices,” an executive says.
After staging a sharp recovery since the beginning of this year, the price of iron ore plunged almost 30% from its February peak.
Maybank IB says although there is limited dumping risk presently, given the improved demand in China, the safeguard duties will protect the local steel industry from any massive imports over the next three years.
The direct beneficiaries from the lower iron ore price is Ann Joo, which manufactures its products with iron ore.
Ann Joo’s hybrid blast furnace technology is one of its kind that could either use iron ore or scrap metal as feedstock.
Shares in Ann Joo hit a new high at RM2.89 this week following the government’s decision to extend the safeguard on steel imports.
The counter is currently trading at single-digit price-earnings of 8.5 times.
AmInvestment Bank says Ann Joo controls 20% of the market and that the firm’s average selling price is expected to improve with the safeguard duties until 2020.
It expects local steel demand to pick up, especially with the ongoing reform in China to cut steel capacity.
“We have raised our financial year 2017 (FY17) to FY19 net profit forecasts for Ann Joo by 12%, 30% and 31%, respectively,” it says.
Although Ann Joo could benefit from the plunge in iron ore prices, higher coal prices would offset it.
The higher price of coking coal translates into higher input costs, which is used by Ann Joo to fire up its factory.
Nonetheless, major infrastructure projects are expected to increase demand for steel products.
“There are several property projects coming into the pipeline, which would also be catalysts for the local steel players,” an analyst says.
