Steel manufacturing companies in Malaysia are impacted by the challenging environment in the steel industry caused by the increase production of cheaper steel products by China mills. — Reuters photo
KUCHING: Companies in Malaysia’s building materials sector are impacted by the challenging environment in the steel industry caused by the global oversupply of steel products spurred by China.
Affin Investment Bank Bhd’s research arm (Affin Research) in a recent note, highlighted the outlook for the global steel market will continue to remain challenging on the back of the oversupply situation.
“Due to the oversupply, international steel prices continue to fall. In the first half of 2014 (1H14), the average selling price (ASP) of Commonwealth of Independent State (CIS) export billet fell by 4.7 per cent year-on-year y-o-y to circa US$496 per metric tonne (MT).
“Similarly, the ASP of CIS export rebar declined by a sharper 8.8 per cent y-o-y to circa US$540 per MT.
“Year-to-date, the price of CIS export rebar continues to be on the downtrend, averaging at US$537 per MT.
“Given the softening China economy as well as the still soft developed economies, we do not expect global demand to improve significantly in the near term.
“As such, we expect international steel prices to continue to remain soft in the near future,” it outlined.
MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) also pointed out that challenges for steel industry would persist with steel prices continuing to be weak unless the Government approved measures to cease dumping of cheap steel products.
“Increase in intensity of dumping of cheaper steel products by China mills has caused prices of steel bars and wire rods to remain weak for the industry.
“In addition, the global production overcapacity in particularly China which is higher relative to steel demand is likely to continue to impact steel product prices,” the research team said.
Among companies that were impacted by declining prices in steel are Lion Industries Corporation Bhd (Lion Industries) and Ann Joo Resources Bhd (Ann Joo).
In particular, MIDF Research noted the steel manufacturing company; Lion Industries saw its profit from its operations in the steel division was declining lower at RM2.2 million in the fourth quarter of the financial year 2014 (4QFY14) as compared to RM7.9 million in the preceding quarter.
Cumulatively in FY14, MIDF Research noted that the company’s steel division reported losses of RM51.3 million.
Of note, the group’s revenue in FY14 declined by 4.2 per cent year-on-year (y-o-y) to RM4.15 billion while operating losses increased by more than 100 per cent to minus RM46.8 million contributed largely by losses of its steel division of RM51.3 million.
“In 4QFY14, the group reported higher impairment losses and a write down in value of inventories.
“This include impairment losses on quoted and unquoted investments of RM13.5 million, impairment losses on trade and other receivables owing by related parties of RM429.7 million, impairment losses on PPE of RM32 million, and write down in inventory value of RM10.3 million.
“These exceptional items led to a wider loss after tax of RM502.8 million in FY14 as compared to a loss of RM34.5 million in FY13,” the research team explained.
All in, MIDF Research said, pending further clarity from outcome of the petitions of local steel mills which have submitted their petitions to Ministry of International Trade and Industry (Miti) for trade remedies against the dumping of steel products which have impact profit margins, it maintained its forecast of Lion Industries for FY15.
Similarly, Ann Joo’s revenue performance for 2Q14 declined by 11.6 per cent to RM606.3 million predominantly due to lower selling price despite buoyant domestic demand, said Affin Research.
The research team explained, Ann Joo’s 2Q14 pretax profit (PBT) fell sharper by 69.9 per cent to RM4.1 million largely due to the recognition of overhead cost for several abnormal breakdowns of the iron and steel production as well lower margins of 2.2 versus 2.8 per cent in 1Q14.
“As a result, 2Q14 core net profit declined by 23.9 per cent to RM6.5 million,” it added.
On a more positive note, AmResearch Sdn Bhd (AmResearch) viewed that, Ann Joo is able to better withstand these competitive pressures going forward, thanks to the much-improved cost structure of its blast furnace (BF).
“Furthermore, the muted pricing outlook for coking coal and iron ore (key inputs for Ann Joo’s BF) puts the group in a more advantageous position over local/regional scrap-based Electric Arc Furnace (EAF) operators.
“In any case, we expect Ann Joo’s sequential earnings momentum to pick-up from 2H14 as its production levels normalise despite a weak pricing outlook.
“Equally, potential trade measures that could be imposed on both long and flat products in Malaysia could help level the playing field against the dumping of cheap Chinese steel imports,” it added.