News Room - Steel Industry

Posted on 04 Jun 2008

Lion Industries Q3 profit boosted by higher steel prices

Higher average selling prices and profit margins for steel due to a shortage of billets worldwide boosted the earnings of Lion Industries Corp Bhd in its third quarter ended March 31. 

OSK Research Sdn Bhd said in a report the mismatch between the higher average selling prices and cheaper raw materials and the “severe shortage of billets within Asean and worldwide has strengthened manufacturers' pricing power.”

Lion Industries' operating profit surged to a record high of RM182.6mil for the third quarter.
 
“While we expect a possible contraction in average selling prices, we believe that raw material prices, particularly scrap metal would remain firm, underpinned by a 65% and 200% price increase in iron ore and coking coal respectively this year,” the brokerage added.

According to OSK, prices of hot briquetted iron (HBI) that were benchmarked to scrap metal were unlikely to see any drastic drop in the near future.

Given that direct reduction iron (DRI) had the same usage and pricing as HBI, the brokerage said it was positive on the contribution of 21%-owned Lion Diversified Holdings Bhd upon official commissioning of the new DRI plant in Banting.

“We estimate a minimum profit of US$38 per tonne from Lion Diversified, based on 75% utilisation of the plant in the first year of operation,” it said, adding that the new plant had an annual production capacity of 1.54 million tonnes.

Lion Industries' existing HBI plant, which has an annual production capacity of 2.7 million tonnes, along with the commissioning of the new plant, is expected to translate to 18.1% year-on-year growth in its bottomline for the year ending June 30, 2009 (FY09), said OSK.

“We expect the attractive profit margin to be intact provided that the average selling prices for HBI and DRI do not decline by more than 40%, which we believe is unlikely,” it added.

OSK has raised Lion Industries' net profit estimates by 70.4% to RM544.3mil for FY08 and 73% to RM642.7mil for FY09.

The brokerage expects high crude oil prices and the burgeoning developments in the Middle East, Brazil, Russia, India, China and South-East Asia to boost construction activities and steel demand.

It is maintaining a “buy” call on the counter with a target price of RM6.15 while HLG Securities Sdn Bhd is calling a “buy' with a target of RM3.70.

Lion Industries shares closed 7 sen lower at RM2.80 yesterday on heavy volume of about 8.4 million shares.

“We are positive on Malaysia's steel sector given the rebound in the domestic construction sector and China's move to curb steel exports, which would create a beneficial pricing environment for Malaysian producers,” said HLG Securities.