Posted on 07 Jul 2015
Analysts believe that the building materials sector will face a challenging outlook for the near-to-medium-term arising from the global steel oversupply issues, and persistent, intense competition in the cement sub-sector.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), under the steel sub-sector, 11MP projects may not be sufficient to counter global steel oversupply issue.
Kenanga Research noted that on May 21, 2015, most of the mega projects (which are MRT2, LRT3, HSR, Pan Borneo Highway) were announced as expected in the 11MP.
The research arm opined that a huge portion of the RM260 billion development expenditure will be allocated for infrastructure spending.
According the research house, the construction sector gross domestic product (GDP) growth will accelerate to 9.8 per cent in 2015 from 9.6 per cent in the first quarter of 2015 (1Q15).
“However, given that the China economy is slowing down to result in excess capacity, we view that steel import into local market will increase; hence, nullifying the strong demand from domestic infrastructure activity,” it said.
Kenanga Research noticed that as of year to date (YTD), the average prices for long steel products (billet, rebar, and wire rods) have been reduced by 14.3 per cent to 21.1 per cent, at a similar pace with reduction in raw material cost (coke and scrap).
It further noted that exports (which are iron, steel bars and rods) volume was reduced by 21.4 per cent YTD but imports volume surged by 20.6 per cent YTD.
Kenanga Research noted that although the gap of exports and imports price have narrowed, steel import price appears to be competitive at below RM2,000 per metric tonne (MT).
Hence, the research arm reiterated its view that the lower raw material costs may not provide sufficient positive impact to margin due to stiff competition from steel imports.
In terms of iron ore price, Kenanga Research noted that it rose by 20.6 per cent quarter on quarter (q-o-q), which the research arm believed was due to a delay in port works in Pilbara by BHP Billiton in Australia.
“However, we view that iron ore price will fall in near-term as there is a slump in Chinese demand for steel due to slowdown in economy and construction activity,” it said.
Kenanga Research noted that on July 1, the government announced a final safeguard duty on hot-rolled steel plate (HRP) imports with effect from July 2, for a period of three years to safeguard the local industry.
It further noted that the progressive liberalisation will be from July 2, 2015 to July 1, 2016 (17.4 per cent), July 2, 2016 to July 1, 2017 (13.9 per cent) and July 2, 2017 to July 1, 2018 (10.4 per cent), to replace the provisional duty of 23.9 per cent announced on December 15, 2014.
Steel companies under the research arm’s coverage, which are Ann Joo Resources Bhd (Ann Joo) and Malaysia Steel Works (KL) Bhd (Masteel) are upstream players which do not produce HRP.
However, the research arm noted that although Ann Joo has a trading division with circa 40 per cent of revenue and earnings before interest and tax (EBIT) that trades in downstream products, including HRP, this news should not have any material impact on Ann Joo as the group has the option to choose their source of HRP between local or overseas suppliers, whoever can offer the best price.
As for the cement sub-sector, Kenanga Research expected it to remain challenging due to intense price competition among competitors.
It believed the lower input cost will have a delayed or muted effect to Lafarge’s earnings due to the group’s partial self-hedging policy, as both coal purchases and cement exports are denominated in US dollar.
Above all, the research arm remained cautious on the cement players’ earnings outlook due to intense industry competition, which will likely result in a price war.
For the aluminium sub-sector, Kenanga Research noted that the price has been trending downwards and it dropped to below US$1,700 per MT as of June 2015 due to excess global aluminium supply in 1Q15.
“However, aluminium prices have rebounded from its 16-month low of US$1,650 per MT,” the research arm said.
Kenanga Research viewed that the fall in aluminium price may have bottomed out and is likely to rebound in the near-medium-term, the research arm retained its aluminium price assumption at US$1,800 per MT.
“We note that global consumption level has surpassed global production by 291,100 MT as of 2Q15. Hence we believe that this should drive aluminium prices higher over the longer term,” it said.
In view of the current low aluminium prices, the research arm opted to be conservative and hence have recently revised downwards its assumed aluminium prices from US$1,900 per MT to US$1,800 per MT for its aluminium coverage Press Metal Bhd (Press Metal).
In conclusion, Kenanga Research reiterated its ‘neutral’ stance on the building materials sector due to challenging near-medium-term outlook.
However, it advocated investors to continue to accumulate Press Metal as the research arm expected the group’s Phase 2 capacity will be fully commissioned by end 3Q15 and Phase 3 capacity expansion of 320,000 MT to commence in 4Q15.
“This will contribute significantly to the group’s bottomline,” it said.
