Posted on 23 Jul 2019
Prospects for the local building materials industry is expected to improve in the second half of the year, on the back of the commencement of mega and infrastructure projects.
In a sector update report, UOBKayHian expects more construction activities in the second half of 2019, which will create more cement and steel demand.
Additionally, industry consolidation in the cement industry, as well as a potential easing in steel oversupply in the second half of the year, would support a recovery in average selling prices (ASPs).
“Particularly, near term catalysts for the sector will emerge from the East Coast Rail Link (ECRL) project which is set to be relaunched by end-August 2019.
“Local steel bar prices improved marginally to RM2,195 per tonne as at July 12, compared to RM2,165 per tonne in June, largely due to a low base effect during the Ramadhan and Hari Raya season - compounded by muted construction activities.
“We are forecasting steel ASPs of RM2,400 and RM2,500 for RM2,200 and RM2,300 for 2019 and 2020, respectively,” said UOBKayHian.
The research house believes that industry consolidation, coupled with the gradual improvement in cement demand, will help to sustain a series of gradual hikes in cement ASP in the second half of the year (H2’19).
Assuming cement ASP is raised twice in H2’19 at a rate of 10% on every hike, UOBKayHian said cement ASP could reach RM242 per tonne by year-end, which surpasses Hume Industries Bhd's breakeven ASP of RM230 per tonne.
“We think that the upcoming results announcements for the sector will continue to be mundane.
“Based on our generic theoretical model, gross profit margin for steel companies is expected to ease to an average of RM454 per tonne in the second quarter of 2019 (Q2’19), as compared to RM476 per tonne in the first quarter,” said UOB KayHian.
In Q2’19, the average steel bar prices were up by only 1.7% quarter-on-quarter (q-o-q) to RM2,202 per tonne.
In comparison, iron ore prices saw a 20.7% q-o-q increase to US$101 per tonne as compared to US$84 per tonne in Q1’19.
Meanwhile, China steel prices remain elevated as a result of the production curb in Tangshan city, causing iron ore as well as ferrosilicon and manganese alloy prices to surge, at 7.2% month-on-month to US$1,195 per tonne and 4.3% to US$1,265 per tonne, respectively.
According to newswires, China Hebei Steel raised its purchase prices for alloys in accordance with market expectations, and some suppliers have been closing down their manufacturing facilities, especially in the European region.
“We view this development positively, although sustainability is yet to be seen given that China steel production may weaken in H2’19 after reaching peak production in May to June. Should the price hikes be sustainable, Cahya Mata Sarawak will see firmer earnings contribution from 25%-owned associate OM Sarawak, particularly in the second half of the year,” said UOBKayHian.
