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Monday, May 7, 2018

Margins seen shrinking for steel firms

CORPORATE NEWS
Monday, 7 May 2018

Still a buy: An Ann Joo Resources facility. UOB Kay Hian maintains its ‘buy’ rating on Ann Joo but has reduced its target price to RM3.60 from RM4.50 previously.

PETALING JAYA: Local steel companies, which were subjected to share price swings in recent times following concern on how big an impact the US-China trade spat would have on them, are expected to see improved margins in their soon-to-be released first quarter (1Q18) results.

According to UOB Kay Hian, based on year-to-date spot prices, gross margin per tonne of steel should improve quarter-on-quarter (q-o-q) in 1Q18 to RM711/tonne versus 4Q17’s RM708/tonne.

This comes as the price of steel bars has climbed more than 9% q-o-q to RM2,717/tonne in the first quarter of this year.

But this optimism may be short-lived. It said steel companies may be in for a more challenging period after that as a result of rising local supply which in turn will put pressure on average selling prices (ASP) of steel products.

“Moving into 2Q18, we may see gross margin shrink to RM676/tonne based on available data,” it said.

New competition will come from players such as China-owned Alliance Steel, which could add up to 16% to existing capacity.

Elsewhere, Lion Industries Corp Bhd
image: https://cdn.thestar.com.my/Themes/img/chart.png is also looking to significantly raise the utilisation rate at its Johor plant in 3Q18 and mulling to restart its Banting plant in 4Q18.

Collectively, the three plants could effectively raise industry long steel capacity by 30%, noted UOB KayHian.

“Based on an assumption of 5% growth in steel consumption in 2018, we think that the industry utilisation rate could fall from 88% in 2017 to 75% in 2018 based on the base case scenario where Alliance Steel comes on stream with 1.5 million tonnes capacity and Lion Industries ramps up its utilisation rate at its Johor plant, which currently has a 20% utilisation rate.”

It said that in the worst-case scenario, it sees industry utilisation rate falling to 68% if Lion Industries reactivates its Banting plant which has 500,000 tonnes of steel making capacity.

However, the research form thinks this worst-case scenario would unlikely materialise because Lion would need to consider the huge financial resources and long project payback period in restarting the Banting plant.

Last year was a good year for local steel companies, which saw a turnaround in their fortunes after several years the industry being in the doldrums.

However, in its report UOB Kay Hian noted that steel prices have eased in the month of April, contracting by close to 5% month-on-month to RM2,575/tonne.

Local billets prices, meanwhile, declined by 4.6% to RM2,225/tonne in that month.

“Apart from softer China steel price in April, we think local steel prices were weak for that month because mega and infrastructure projects have yet to take off.

“We also think traders are taking into account potentially softer steel price moving into the second half of the year as new supply comes into the market and existing millers are expecting to ramp up production.”

As for China, steel prices there are capped with the five-year plan beginning 2016 for steel capacity cuts coming to its tail end.

The Chinese government aimed to cut 100 million to 150 million tonnes of steel production capacity.

“As at 2017, Chinese officials had already slashed 115 million tonnes of steel production capacity and targeting to cut another 30 million tonnes in 2018.

“Assuming this is achieved in 2018, the Chinese government will only be left with five million tonnes of steel capacity cuts in 2019, which also means that they achieved the 5-year plan way ahead of the original plan,” said the research firm.

However, industry players remain sanguine of their prospects.

As for stocks under its coverage, UOB Kay Hian maintains its “buy” rating on Ann Joo Resources Bhd
image: https://cdn.thestar.com.my/Themes/img/chart.png but has reduced its target price to RM3.60 from RM4.50 previously.

Similarly, it has cut the target price on Choo Bee Metal Industries Bhd
image: https://cdn.thestar.com.my/Themes/img/chart.png to RM2.70 from RM3.10 before.

“Unlike Ann Joo, Choo Bee has been less volatile in terms of earnings cycle as demand and ASP for steel products has been relatively stable.

“We believe that the flat steel segment will not suffer the same oversupply issue as the long steel segment but the flat steel segment is dependent on the import exemption which has to be renewed on a yearly basis.”

The shares of most steel stocks are down since the start of the year. Ann Joo, the largest steel company by market capitalisation on Bursa, closed last Friday at RM2.91 – down by close to a quarter year-to-date.

Read more at https://www.thestar.com.my/business/business-news/2018/05/07/margins-seen-shrinking-for-steel-firms/#v5F8WfeVv8D5Tbiq.99

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