Medium-term prospects for the industry continue to look promising
CHINA has long been blamed for the global steel industry’s woes.
But this year, the once beleaguered sector saw a change in its fortune as China’s steel prices stabilised, driven by government initiatives to reduce its steel production capacity in a bid cut the steel glut and reduce pollution there.
Over the last five years, China had flooded the global market with cheap steel, which put pressure on steel prices, pushing many local companies into dire straits. Unprofitable steel plants stopped operations, while the bigger players saw their losses growing. Some had their bonds downgraded to junk status.
For this year, the prices of steel were not driven by demand, but by supply from China.
Steel prices were driven by China’s effort to curb pollution by closing down some mills. But that has changed this year. Local steel players continue recording strong earnings growth on rising steel prices and a steady increase in domestic demand driven by infrastructure projects.
Among the local steel players which have recorded big gains in their earnings in the recent results season are Ann Joo Resources Bhd , Southern Steel Bhd , Malaysia Steel Works (KL) Bhd (Masteel).
Meanwhile, Lion Industries Corp Bhd had returned to the black in its first quarter ended Sept 30, posting RM27.8mil net profit from RM2.5mil losses a year ago.
Steel stocks have also done very well this year.
Ann Joo, for example, saw its share price rise almost 80% this year, while Southern Steel and Masteel rose 86% and 115%, respectively.
Meanwhile, Lion Industries saw a big leap in its share price with more than 220% jump on year to date basis.
Despite the significant rally in their stock prices, Ann Joo, Masteel, Southern Steel and Lion Industries are currently trading at single digit price to earnings ratio.
Ann Joo’s net profit doubled in the third quarter ended Sept 30 to RM47.2mil from RM22.9mil last year. The company also announced a dividend this year of 8.5 sen a share for the first nine months of FY17 from six sen last year. Southern Steel also saw its net profit almost triple in the first quarter ended Sept 30 to RM53.4mil from RM19.30mil last year. This is the fifth consecutive quarter of profit recorded by the group since it returned to the black last year. Revenue for the quarter increased 54% to RM899.7mil compared with RM585.8mil previously, on higher sales volume.
Steel price to stabilise
Southern Steel pointed out that the uptrend in steel prices since July reached its peak in September, and has started to retrace due to softer demand.
“We expect the demand to pick up with the gradual rollout of infrastructure projects. Barring unexpected circumstances, the board expects the performance to be satisfactory for the financial year ending June 30, 2018,” it said in a filing with Bursa Malaysia last week.
According to China Daily, quoting citing Gu Jianguo, deputy head China Iron and Steel Association (CISA), China’s steel prices would continue to firm up in 2018 as production and supply are becoming more balanced.
“Prices have seen a reasonable rebound, while it is quite normal to see tight supply and price fluctuations during certain periods,” he said.
He said that environmental checks would curb output in 2018 as new capacity was added, with demand and supply becoming balanced.
Meanwhile, according to a UOB Kay Hian report in August, it pointed out that the third quarter would be an exceptionally strong earnings season for steel companies due to a surge in steel prices in August.
Steel bar prices in Malaysia jumped 12.1% m-o-m and 28.9% year-on-year (y-o-y) to RM2,440 per tonne in the first two weeks of August, according to the Ministry of International Trade and Industry.
Nonetheless, it expects steel prices to ease in the last three months of the year to reflect the seasonal slowdown in China’s construction activities. Apart from China demand, UOB reckon that local inventory was low currently and local stockists had curbed deliveries.
“Rising domestic demand (amid a pick-up in mega projects) should provide some support to domestic steel prices.
“Domestic steel billets are fetching an 18% premium to China’s billet prices versus a 4% premium in August 2016,” it said.
UOB says given that steel companies were now enjoying strong cash flows and reasonably good demand visibility in the intermediate term, it expected some steel companies to adopt generous dividend policies and would embark on a meaningful capacity growth.
Ann Joo, in its quarterly report, said that South-East Asia’s demand for construction steel in 2018 is expected to exhibit growth that is above the global average, propelled by huge infrastructure spending, creating continued export opportunity.
“While the medium-term outlook is promising, the group also notes some potential seasonal effects on demand, including the monsoon period in the fourth quarter of each year,” it said.