At the Malaysian Iron and Steel Industry Federation (MISIF)’s conference last week, some presenters were upbeat on steel demand in view of the robust flow of construction jobs. However, we believe that any apparent improvement can only be expected after the General Election. MISIF has asked the Government to impose anti-dumping duties, particularly on wire rod imports. Boston Consulting Group’s (BCG) study on the steel industry on behalf of the Ministry of International Trade (MITI) is welcome, but execution is key. Elsewhere, the general feedback from the steel players remains bearish, with most only projecting a potential recovery after the Lunar New Year in February 2013. Thus we are keeping NEUTRAL on Malaysia’s steel sector.
MISIF conference. Last week, we attended the MISIF conference with the theme, "The Status and Outlook of The Malaysian Iron and Steel Industry". The two-day conference was opened by Deputy Minister of International Trade and Industry, Datuk Jacob Dungau Sagan.
Focus on dumping risk. In his welcome address, MISIF president Datuk Soh Thian Lai said the local industry is currently pressured by an influx of cheap metal, especially from China. He urged the Government to be decisive and impose temporary anti-dumping measures on the cheaper imported steel goods currently flooding the country while the investigation on certain products for instances of anti-dumping is being carried out. Meanwhile, Datuk Jacob said MITI’s newly set up Malaysia Steel Council (MSC) expects to announce “at least one or two’’ new measures before year-end to address local steel players’ concerns over the influx of imported steel goods into the country. We think the product in focus is wire rods, on which MITI has initiated preliminary investigations. However, it may take another month before the Government makes a decision. The imposition of any anti-dumping duty may bring cheer to Lion Industries, Southern Steel, Kinsteel and Ann Joo Resources by virtue of their exposure in wire rods production.
Projecting moderate growth. MISIF consultant Frank Mizuno said the federation’s forecast is based on its baseline scenario of Malaysia’s steel consumption growing by 3% in 2012 and 2013 before improving by a slight 4% in 2014. He is projecting for an apparent steel consumption (ASC) of 8.5m tonnes this year and 9.1m tonnes in 2014. Mizuno expects the key driver of consumption going forward to be the continuing investments from both the Government and private sector. Separately, Datuk Soh proposes that local steel players pursue mergers and acquisitions (M&As) among themselves as the current industry is too fragmented. He also said that steel companies should also pursue joint ventures with international steel players to accomplish to the same end.
Robust flow of construction jobs. The Construction Industry Development Board (CIDB)’s senior general manager Sariah Abd Karib, in presenting her paper entitled "Status and Outlook of The Construction Sector", said the value of new construction jobs in the country is expected to reach at least RM90bn this year and RM91bn in 2013, underpinned by Economic Transformation Programme (ETP) initiatives and the 10th Malaysia Plan (10MP). Last year, some RM95bn worth of projects were given out. CIDB expects more public-private partnerships and ETP projects to get off the ground this year. These will include the various packages for the Mass Rapid Transit (MRT) project, the Kuala Lumpur International Financial District and a number of tolled highway projects. These projects, together with private investments in housing and other non-residential and civil projects, will contribute significantly toward a private sector-driven construction sector. Despite the robust project flows having helped keep local steel prices relatively stronger than the international spot price, we think the conclusion of the upcoming General Election remains a key to whether those public projects would eventually be implemented.
New roadmap for Malaysian steel industry. Boston Consulting Group (BCG) was hired by MITI to undertake an in-depth study on the current plight faced by players in the country's steel sector. BCG partner and managing director Puan Nor Azah Razali said the local steel sector currently contributed about 4% to the country’s GDP and employed about 150,000 people. On BCG’s recommendations to MITI, she said three key initiatives have been recommended for the Government to consider:-
- Providing advantage access to local raw materials such as iron ore,
- Enforcing trade remedies and standards i.e. strengthen safety net and improve importation processes, and
- Enhancing the overall industry capabilities via the formation of a Malaysia Steel Council (MSC), which will act as a mechanism that will close the critical gaps in the industry, and an independent body such as the Malaysian Steel Institute, which is vested with the authority to enforce standards.
Work in progress? BCG’s Puan Azah noted that MITI has acted on BCG’s recommendations in the setting up of the MSC, a technical committee and five working groups (WGs) to address the proposals for the roadmap for the steel sector. WG 1 is for solutions to Megasteel’s woes, WG2 is access to key inputs (including price mechanism), WG 3 relates to the steel industry’s capabilities, WG 4 covers standards and imports, while WG 5 looks at trade remedies. We welcome BCG’s study and proposals although we think the content of the study are merely a compilation of policies announced or proposed earlier by MITI, albeit with a clearer definition and target timeframe for execution. Therefore, its execution still remains to be seen.
New landscape for stainless steel market? MISIF’s stainless steel group chairman Mark Lim said Malaysia's consumption of stainless steel appeared to be trending up again since dipping in 2008. In 2010, consumption touched 256,000 tonnes vs 120,000 tonnes in 2008. Within Asean, Thailand used to be the largest consumer of stainless steel but its position was challenged by Vietnam in 2010. According to Lim, the development of the automotive and construction sectors in Asean had greatly boosted the use of stainless steel. Meanwhile, Asean is a net importer of upstream stainless steel but the completion of Bahru Stainless Steel SB’s (BSS) plant in Johor by 2020 would have an impact on the regional markets since supply would then be more easily available. BSS is a joint venture between Spain-based Acerinox Group and Japan-based Nisshin Steel.
Bearing tone in general sentiment. We spoke to a several industry players on the sidelines of the conference and observed that the general feedback from the steel players remains bearish. Most of the people we spoke to blamed the slower growth in China for dragging down the overall market. Certain quarters blame the prolonged delay in holding the General Election for disrupting the project execution pace, particularly in public initiated projects. Many are expecting steel prices to continue to be volatile and to only see a more sustainable recovery after the Lunar New Year next year, if any.
NEUTRAL, near term pessimistic. As the feedback we gather from the MISIF conference concurs with our original view that challenges are still aplenty within the Malaysian steel industry, we are making no changes to our projection and fair values on the steel stocks under our universe. We continue to give Perwaja (FV RM1.12) the benefit of a doubt and potentially gain from its upstream makeover, including its venture into iron ore mining. Hence we maintain our Trading BUY call on the company. However, we are staying NEUTRAL on the rest of the steel counters. Overall, we re-reiterate our NEUTRAL stance on Malaysia’s steel sector as we see limited movement in steel prices. Nonetheless, some quarters may hold on to their shares in these steel stocks on expectations that the ETP projects would spur demand, in spite of steel companies’ disappointing financial results.
Source: OSK
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