Steel sector poised for next surge

KUCHING: Average selling price (ASP) for steel products have been escalating since December last year, but the increase so far has been mainly driven by the cost-push element.

STEEL SECTOR: OSK Research expects steel prices to go up by 10 per cent to 15 per cent in the next few months.

OSK Research Sdn Bhd (OSK Research) expected steel prices to go up by 10 per cent to 15 per cent in the next few months on the resumption of private and public construction activities post the Chinese New Year celebrations, as well as the stocking up by traders in anticipation of a price increase.

Furthermore, with higher coking coal prices and possibly a much larger jump in the iron ore benchmark, the ASPs of steel products were definitely looking up although their sustainability were still subject to improvement in real demand.

It stated that as blast furnace (BF) technology dominated more than 60 per cent of global steel production, the settlement of iron ore prices might be the key determinant of the ASP of steel products.

Nevertheless, that included the scrap metal, which was feed material for electric arc furnaces (EAF).

As such, the conclusion of new benchmark prices is still vital for local steel players as raw materials cost and general steel prices would take the cue from the new contracts.

Notwithstanding, all local steel millers are still operating EAFs except for Ann Joo’s new BF, which was scheduled for commissioning in the third quarter of this year.

The new benchmark aside, the research firm opined that with on-going projects helping to sustain 70 per cent of regular annual steel consumption, the balance might be compensated if most public projects were executed in a timely manner.

Local steel mills had exported on average a total of more than one million tonnes of steel products annually, particularly in the last two years.

Malaysia’s exports escalated after China imposed a 25 per cent export tax on billets, creating a vacuum of five million tonnes of billets in the South-East Asia (SEA) market, as China previously supplied 75 per cent of the region’s requirements.

An improvement in the economies of the Middle East, Australia, Pakistan, Bangladesh and so on would also be a boon to Malaysia’s billet export, added the research firm.

Apart from that, Steel Business Briefing reported that Japan’s integrated steelmakers had conceded to the demands of their largest coking coal sup­plier, Australia’s BHP Billiton Mitsubishi Al­liance (BMA) and accepted a quarterly price for hard coking coal.

From April onwards, the new price for BMA’s Queensland hard cooking coal brands Saraji and Peak Downs would be US$71 higher to US$200 per tonne.

However, the steel­makers insisted that the 55 per cent rise on prevailing benchmark prices apply to the coming April-June period only.

The Japanese mills had opposed any shift away from the annual bench­mark, arguing that most of their domestic steel sales were negotiated on annual terms and that quarter pricing could expose them to serious risk.

The research firm cited that the 55 per cent price increase for coking coal was obviously way above the house estimated of 25 per cent.

It highlighted that there has been no formal decision on new iron ore benchmark pricing although it was supposed to have been due by end of this month.

Meanwhile, with the negotiations between miners and steelmakers to set a benchmark price for iron ore, supply contracts were expected to be acrimonious and lengthy, OSK Research continued to factor in a 25 per cent increased in contract price in the earnings estimate.

The 25 per cent forecaste increased covers prices for iron ore fine and pellets as well, despite some speculation that miners were demanding as much as 90 per cent jump from the preceding contract.

Likewise, the research firm was confident of local steel mills reporting encouraging numbers, particularly for the second quarter, buoyed by the mismatch between lower material costs stocked up earlier and higher selling prices.

Generally, it expected no sharp surge in the first quarter despite the better quarter-on-quarter numbers, given the time lag impact and shorter trading quarter last month.

It reckoned that as steel mills had increased their inventories in the past quarter, such that inven­tories at all the integrated steel mills in Malaysia escalated in December last year, the higher ASPs bode well for short term performance.

As the higher contract price for coking coal, which sent out early signals of a possible big jump in iron ore benchmark, OSK Research expected a bullish short to medium term view.

Nevertheless, it was shown in the last report that there was a strong correlation of more than 0.85 times between steel price and share price performance.

Based on the 2010 contribution outlook, OSK Research maintained a target price at a fair value of RM2.51 per share for Lion Industries Corporation Bhd, Southern Steel at RM3.04 per share, Malaysia Steel Works at RM1.45 per share, Perwaja Holdings Bhd at RM1.82 per share, Kinsteel Bhd at RM1.17 per share and Ann Joo Resources Bhd at RM2.75 per share.