Steel still going strong
Lim Cian Yai 
Steel prices are expected to pick up on progress in local infrastructure projects and growing regional demand

Steel prices have been seeing a bull trend in the past two years. Many had thought the run-up would soon fizzle out but they were proven wrong.

Prices of the commodity have gone from strength to strength. In December last year, the average spot price of Chinese domestic steel rebar with a diameter of 25mm tried to challenge the RMB5,000 key resistance mark, but it did not stay long at this level.

It has since retreated to about RMB4,200 per tonne, but this is at least double what it was two years ago.

Questions arose on how far steel prices can continue their good run given that the current price level has already fully factored in the impact of capacity cut in China, which has been the key theme for the metal market in the past one year. China accounts for roughly half of the global production of steel, coal, aluminium, glass and cement.

That said, long steel product manufacturers are positive on the sector’s prospects moving forward. Ann Joo Resources Bhd group managing director Datuk Lim Hong Thye agrees global steel prices, especially for long products in China, have priced in the aggressive capacity cut, thus the sharp increase in prices in the past two years.

Lim says prospects for long product makers will be better with the rollout of mega projects

“Moving forward, steel prices will be influenced by the growth in demand with many countries in this region experiencing an infrastructure boom, and further supply restrictions from China, if any,” he says in an email response to FocusM.

Lim asserts that steel prices, especially for products catering to the domestic construction sector, will be dictated by market supply and demand this year.

Overall, he has witnessed a more favourable operating environment for long product producers in Malaysia compared to a few years ago.

“The prospects will certainly be better with the rollout of mega infrastructure and property projects,” he adds.

Ann Joo’s performance in the past one year has been catapulted by the recovery of global steel prices and initiation of several high-impact projects in the country.

The safeguard measures implemented by the government last April to curb excess import of rebar, wire rod and deformed bar in coil have also provided another boost to local steel companies.

Ann Joo is Malaysia’s largest steel company by market capitalisation. It runs a steel plant and a rolling mill catering for the long product segment, with an annual capacity of 820,000 tonnes and 650,000 tonnes, respectively. Products from the two plants include steel billet, deformed high yield bar, steel round bar and wire rod.

Meanwhile, its wholly-owned subsidiary Anshin Steel Service Centre Sdn Bhd is mainly involved in flat steel products with expertise in the slitting and shearing of hot-rolled pickled, oiled coils, cold-rolled coils and galvanised iron.

For the nine months ended Sept 30, 2017, Ann Joo’s net profit surged to RM149.86 mil from RM120.83 mil a year ago, on the back of higher turnover at RM1.58 bil versus RM1.4 bil.


Pick-up in construction

The company attributes its higher revenue to higher selling prices, in tandem with the uptrend of international steel prices. Its performance was further supported by higher tonnage sold on gradually improving domestic demand from construction progress of various infrastructure and large-scale development projects as foreign labour constraints and seasonal factors eased in Q3 2017.

TA Securities, in its research report last November, notes that Ann Joo’s earnings growth will continue to be driven by the pick-up in the construction progress of local infrastructure projects and growing regional steel demand.

Meanwhile, local steel prices will continue to be supported by ongoing capacity elimination and expected lower steel production during the winter months in China. The safeguard duties in Malaysia will continue to play a role to deter any massive import from other countries, he added.

“We expect the group to deliver stronger Q4 results due to higher steel prices and potentially lower material prices, especially for iron ore and scrap iron in comparison with Q3 due to declining demand from Chinese steel mills during the winter period,” it adds.

Southern Steel Bhd, which is involved in a segment similar to Ann Joo, returned to the black with a net profit of RM93.3 mil on the back of higher revenue of RM2.64 bil in the financial year ended June 30, 2017 after posting two consecutive years of losses.

For the first quarter ended Sept 30, 2017, its net profit rose 176% yoy to RM53.42 mil on the back of higher revenue of RM899.75 mil.

However, the same growth momentum was not seen in flat steel product players like CSC Steel Holdings Bhd.

Despite a 27.76% yoy increase in revenue to RM956.07 mil for the nine months ended Sept 30, 2017, CSC Steel recorded a lower net profit of RM44.98 mil compared with RM62.5 mil a year ago, as a result of higher raw material cost as well as the cost increase for hot-rolled coil, which far exceeded the increase in selling prices.


Bubble in the making?

Cynics are wary of a possible bubble in the steel market as the current high steel prices will eventually lead to surplus capacity.

Already the iron ore (rocks and minerals from which the metal iron is extracted) used in making steel is piling up in major Chinese ports. The country is also the world’s largest importer of iron ore.

Notably, the last time steel traded at above RMB5,000 per tonne was in early August 2011. Then, the price also did not stay long at that level, retreating to below RMB5,000 in just a few days, Bloomberg data showed.

The only time it managed to stay longer at above the RMB5,000 level was back in 2008. The price had increased steeply from RMB4,462 per tonne in January to RMB5,665 in April, a 27% increase within a span of four months. It stayed at above RMB5,000 for the next four months before tumbling to about RMB3,550 in October when the Global Financial Crisis struck.

However, Ann Joo’s Lim disagrees that the current high global steel prices will result in excess capacity, as the recent price surge was mainly due to the sharp reduction in supply, resulting from a capacity cut directed by Beijing since 2016.

The Chinese government has a target of cutting steel and coal capacity by at least 10% over five years, reducing potential global supply by 5%.

“This is very different from the price surge in 2006-2008 which was caused by a sharp surge in steel demand,” says Lim.


Dumping ground

“With the Chinese government taking a firm stand in cutting excess capacity, I do not foresee a repeat of the ‘China factor’ that we experienced in 2013-2015.”

In the two years from 2013, steelmakers had rapidly expanded their manufacturing capability. The result was declining steel prices from RMB3,800 to RMB1,900 per tonne by the end of 2015.

In the meantime, Malaysia had become the dumping ground for steel from China, a situation that severely impacted the livelihood of local steelmakers, both in the long and flat steel segments.

Industry players believe steel prices will pick up again in Q2, in light of the cyclical nature of construction activities in China. Winter and Chinese New Year are low seasons for building activities in the country. Infrastructure projects only kick off or resume when the weather gets warmer, usually in March or April.

Till spring arrives, the steel market is expected to see an overhang in price. This is probably the reason behind a rather tepid trend in Ann Joo’s share price.

The counter closed at RM3.56 on Jan 17, giving it a market capitalisation of RM1.83 bil. For the past three months, the counter has been hovering at between RM3.70 and RM3.90.

This article first appeared in Focus Malaysia Issue 268.