This article first appeared in The Edge Financial Daily, on April 11, 2016.
KUALA LUMPUR: The recent recovery in international steel prices has resulted in renewed interest in steel-related companies which has seen share prices climbing over 60% since last month.
However, investment analysts doubt that the share price rally would have legs moving forward, simply because the demand for steel is still relatively weak, in addition to the overcapacity in the industry.
Analysts are cautious about the rally as the uptrend was not driven by fundamental demand.
When contacted, MIDF Research analyst Kelvin Ong stated that buying activities in the past 30 days were mainly driven by the steel suppliers’ inventory replenishment.
“When steel prices are low, producers don’t like to have a high inventory; now that the price has gone up, they have started to stock up for replenishment, so the demand comes from the suppliers, not driven by fundamental demand in steel consumption, like the construction sector,” Ong explained.
He expects share prices of the local steel players to normalise after the rebound.
“Having said that, their profitability will still depend on global raw material prices, but in the short term, with all factors remain unchanged, it (prices) should be normalised now,” he said.
Malacca Securities Sdn Bhd analyst Kenneth Leong concurred, pointing out that although demand remains constant, with higher steel prices, industry players are poised to have better margins.
In March, steel billet and steel bar maker Malaysia Steel Works (KL) Bhd (Masteel) saw its share price jumped 69% to 63.5 sen as at March 31, from 37.5 sen in the beginning of the month. It continued to climb to a 11-month high of 68 sen last Thursday, and pared gains to close at 67.5 sen last Friday. It has a market capitalisation of RM164.53 million.
Despite the more conducive steel prices, a Public Investment Bank analyst said they are still insufficient for players like Masteel to break even.
“Masteel’s break-even price should be at about RM1,800 per tonne. The current price is not enough, but it is better than nothing. I would prefer to wait until their first-quarter (ending March 31, 2016) results before forming any opinion,” he said.
Industry players that have enjoyed a similar trend include Ann Joo Resources Bhd and Southern Steel Bhd, which saw their share prices appreciating 63.2% and 42.86% respectively since March 1.
The higher steel prices were initially triggered by China’s announcement on Feb 29 of plans to lay off 1.8 million workers in the coal and steel industries, about 15% of the workforce from both industries, to curb the overcapacity situation.
Since Feb 29, China domestic steel bar average spot prices have increased by 23.67% to 2,623 yuan (RM1,589) per tonne, from 2,121 yuan per tonne.
Nevertheless, in a research note dated April 5, Kenanga Research analyst Sarah Lim reckoned that the cut in China steel production may not be sufficient to support local steel demand due to stiff competition from cheaper imports.
“Although China announced in end January 2016 that its steel production capacity will be cut by 100 to 150 million tonnes, China itself has surplus capacity of circa 300 million tonnes, which means that the cut in production capacity does not necessarily translate into a cut in steel exports from China. This, therefore, neutralises the positive impact on the local steel sub-sector,” she noted.
Last Friday, Ann Joo closed at RM1.02, one sen or 0.97% lower, valuing the group at RM510.58 million, while Southern Steel also fell one sen or 0.99% to RM1, with a market capitalisation of RM419.42 million.