Analysts believe that the construction sector’s growth will be stronger as the government will likely pivot their focus onto development capex such as pump-priming for the mid-long-term growth of the nation. — Bernama photo
KUCHING: The research firm of Kenanga Investment Bank Bhd (Kenanga Research) anticipate better days ahead for building materials, as the Industrials Product Index (KLPRO index) saw a marginal increase post a rebound in the second quarter of 2020 (2Q20).
In a sector recap, the firm saw that aluminium prices recovered swiftly from the 1,425.85 per metric tonne (MT) in early April to currently which is above US$1,700 per MT, narrowing the year-to-date drop to 4.4 per cent from 20 per cent when the prices were at the 4.5-year low.
In fact, the prices hit a recent high at US$1,764.50 per MT in end-August before retracing to US$1,702 per MT currently. Meanwhile, the average price for the quarter-to-date in 3Q20 is US$1,705 per MT.
“In this depressed business environment, prices are likely to remain volatile but we believe prices should have bottomed out,” it said in its sector review. “During the Global Financial Crisis, aluminium price plunged sharply by 62% from a peak of USD3,271 per MT on 11 Jul 2008 to USD1,252 per MT on 23 Feb 2009 but it formed a V-shape recovery to end the year of 2009 at US$2,197 per MT.
“As such, the fall in aluminium price of late is not alarming as when the pandemic subsides, prices are likey to recover swiftly, in our opinion.”
Kenanga Research saw that alumina prices also recovered to US$285 per MT currently which is merely one per cent off from US$289 per MT at the beginning of the year while the percentage of alumina cost to aluminium price is also within the usual range of 16 to 17 per cent.
“In fact, the quarter-to-date average in 3Q20 of 16 per cent is still much lower than 19.9 and 22 per cent in 2019 and 2018,” it added. “This means that should it maintain at current level, profit margin is likely to improve further from the past two years.
“Meanwhile, the upstream acquisition of two supply chain refineries will ensure raw material supply certainty while the acquisition of PT Bintan has enabled transportation cost savings.”
Also a function of construction demand, Kenanga Research believe that flat steel players such as United ULI Corporation Bhd would likely enjoy the pick-up of any pump-priming initiatives in a more significant manner as compared to the long steel players.
Being the largest cable support system player in a fragmented industry, we think Ulicorp’s smaller competitors, which crowded out the space in 2017, would have either quit, downsized or been shaken out given the current lackluster demand.
Therefore, should any pick-up in construction activities comes into fruition, Ulicorp would be at the forefront to capture the initial demand – which would cascade down to their bottomline in the form of better margins.
“That said, we note that it takes six to nine months for the government’s infrastructure stimulus to work its way into the economy, with ebbs and flows in steel production along the way.”
The only sub-segment with an undesirable existing situation, Kenanga Research said, is long steel. Since 2018, the local steel prices have been trading at constant discount against China’s prices – reflecting the relatively weaker local demand.
To make things worse, the recent pick-up in demand for iron ore — a key raw material in steel making — by China as they rebounded from the Covid-19 pandemic faster than any other nations, has resulted in mounting cost pressures for the local steel players.
“The squeeze from top (sales) and bottom (costs) is likely to weight onto local steel makers’ earnings for the foreseeable future despite them already been mired in losses for the past two years,” Kenanga Research added.
“Moving forward, our view is that the construction sector will be stronger as the government will likely pivot their focus onto development capex such as pump-priming for the mid-long-term growth of the nation.
“But unlike last time whereby steel prices would increase in tandem with construction demand, the dynamics this time around might be slightly different.”