KUCHING: Malaysian steel producers are forecasted to undergo ongoing earnings pressure margin pressure due to low steel prices, high raw materials cost as well as unfavourable regulatory policies from sector-related countries across the globe.
RHB Research Sdn Bhd (RHB Research) analyst Toh Woo Kim opined, “Despite decent volume growth, we believe margins and earnings of Malaysian steel producers will continue to come under pressure due to weak steel prices, high raw material costs, and hikes in electricity and natural gas tariffs.
“Globally, the outlook for the steel sector in 2012 remains challenging due to the slowing demand growth in China and less robust construction activities in developed countries.
“Much has been said but the pace of consolidation in China’s steel industry has not really gathered momentum in the past few years, resulting in a still highly-fragmented industry with excess and outdated capacity, weighing down on industry margins.
“In addition, the fragmented nature of the steel industry also causes the demand-supply dynamics and bargaining power to be more in favour of iron ore miners vis-a-vis steel producers.”
The analyst believed China’s end-demand for steel could turn out to be weaker than expected in the absence of policy easing in the real-estate sector which roughly accounts for 40 per cent of the country’s steel consumption.
The analyst now believed the decline in iron ore prices could be milder than previously expected as a result of supply constraints from the recent hike in export duties on iron ore to 30 per cent (from 20 per cent previously) by India (traditionally the world’s third largest exporter) and bad weather conditions (particularly in the first quarter of this year) that had hampered iron ore supply from the world’s largest exporters, Australia and Brazil.
Toh cut financial year 2012 (FY12) to FY13 earnings forecasts for steel companies under the research house’s coverage by 15 to 23 per cent, largely to reflect lower selling prices for steel products and higher raw material costs.
“Given possible inventory write-down amid weak steel prices, we expect most Malaysian steel producers to go into losses, missing consensus’ expectations. We believe there is substantial downside risk to 2012 consensus earnings forecasts as well.
“Margins and earnings for Malaysia steel producers will continue to remain depressed despite the potential pick-up in the domestic construction activities underpinned by Economic Transformation Programme projects (that could help to improve utilisation rates but not margins),” the analyst cautioned.
Toh noted the risks to RHB Research’s forecast which included a steep rise in global steel consumption that would boost international steel prices and a significant decline in raw material costs.