KUCHING: Malaysia’s steel sector has been viewed positively by analysts as the industry is expected to see a healthy boost in demand from upcoming infrastructural projects such as the MRT2, Pan Borneo Highway, SUKE Highway, and other major projects.
In a report, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) said, for the second half of 2017 (2H17), it expected a pick-up in construction activities from the infrastructure space driven by the increase activities from projects awarded in the financial year 2016 (FY16).
“We believe these projects will lead to higher demand for steel rebars and hence drive steel prices up by circa four to five per cent similar to levels back in January 2017 which we have derived through industry players’ feedbacks.
“We are forecasting an average rebar price of RM2,225 per tonne for FY17 while we note that the average rebar price for 1H17 was circa RM2,167 per tonne,” it said.
It also pointed out that Malaysia’s steel sector would not see immediate threats from China’s steel sector.
The research team said, currently, China steel rebar prices are trading at circa US$450 (RM1,935).
“After incorporating import duties (an increase of five per cent), shipping fees (an increase of circa five per cent) and safeguard measure (an increase of 13.2 per cent), total effective cost for importing Chinese rebars is circa RM2,400 compared with local rebars which are trading at RM1,930 to RM2,080 as of mid-June.
“In addition to the higher prices, the long waiting time of circa two months for imported rebars to be shipped had led to minimal imports from China,” the research team said.
Moving forward, Kenanga Research expect Chinese steel prices to remain stable supported by structural reforms from Chinese government to cut capacity by 150 million tonnes (from 2016 to 2020) – for FY17, they intend to cut circa 50 million metric tonnes (MT) of capacity through the shutdown of Induction Furnaces, and fiscal spending on China infra projects to drive China’s domestic steel demand.
Aside from that, the research team noted that raw prices (of iron ore and scrap) have come down from a peak since 1H17.
“Iron ore and scrap are currently trading at US$62 and US$255, respectively. Moving forward, we believe prices for iron ore and scrap are capped due to increased supply of iron ore from larger players, such as Rio Tinto, Vale from the reopening of mines, and higher surplus of scrap due to the reduced usage in China from closures of induction furnaces (induction furnace are more reliant on scrap while blast oxygen furnace is more reliant on iron ore),” the research team projected.
Overall, Kenanga Research maintained a ‘neutral’ view on the building materials sector despite being positive on the steel and aluminium sub-sectors due to the larger market weightage of its negatively weighted cement sub-sector.
“We are positive on the long steel sector as we expect construction activities within the infrastructure space to pick up pace, which would drive demand for steel rebars and subsequently prices, targeted at RM2,225 per tonne for FY17,” the research team added.