Posted on 21 Feb 2012
The Borneo Post reported that Malaysian steel producers are forecasted to undergo ongoing earnings pressure margin due to low steel prices, high raw materials cost as well as unfavorable regulatory policies from sector related countries across the globe.
Mr Toh Woo Kim analyst at RHB Research Sdn Bhd said that "Despite decent volume growth, we believe margins and earnings of Malaysian steel producers will continue to come under pressure due to weak steel prices, high raw material costs, and hikes in electricity and natural gas tariffs."
He added that "Globally, the outlook for the steel sector in 2012 remains challenging due to the slowing demand growth in China and less robust construction activities in developed countries. Much has been said but the pace of consolidation in China's steel industry has not really gathered momentum in the past few years, resulting in a still highly fragmented industry with excess and outdated capacity, weighing down on industry margins."
Mr Woo said that "In addition, the fragmented nature of the steel industry also causes the demand-supply dynamics and bargaining power to be more in favor of iron ore miners vis-a-vis steel producers."
The analyst believed China's end demand for steel could turn out to be weaker than expected in the absence of policy easing in the real estate sector which roughly accounts for 40% of the country's steel consumption.
The analyst now believed the decline in iron ore prices could be milder than previously expected as a result of supply constraints from the recent hike in export duties on iron ore to 30% (from 20% previously) by India (traditionally the world's third largest exporter) and bad weather conditions (particularly in the first quarter of this year) that had hampered iron ore supply from the world's largest exporters, Australia and Brazil.
Mr Toh cut financial year 2012 to FY13 earnings forecasts for steel companies under the research house's coverage by 15% to 23%, largely to reflect lower selling prices for steel products and higher raw material costs.
He added that "Given possible inventory write down amid weak steel prices, we expect most Malaysian steel producers to go into losses, missing consensus' expectations. We believe there is substantial downside risk to 2012 consensus earnings forecasts as well. Margins and earnings for Malaysia steel producers will continue to remain depressed despite the potential pick up in the domestic construction activities underpinned by Economic Transformation Program projects (that could help to improve utilization rates but not margins)."
Mr Toh noted the risks to RHB Research's forecast which included a steep rise in global steel consumption that would boost international steel prices and a significant decline in raw material costs.
