• We recently attended the Malaysian Iron and Steel Industry Federation (MISIF) conference to gain insights into the latest developments in the global, regional and domestic steel industries.
• The World Steel Association (WSA) has a positive global steel outlook backed by the upturn in the global economy. Based on the WSA’s October 2017 short-range outlook, the global steel demand is expected to grow by 2.8%/1.6% to 1.62bil MT and 1.65bil in FY17F/FY18F driven mainly from China, India and the Asean market. However, steel demand from China is expected to slow down from FY18 onwards as the country’s GDP growth is expected to decelerate to 6.2% in FY18 (vs. 6.6% in FY17F), according to the IMF. We reckon our view on the steel industry is in line with the WSA’s view as: 1) we forecasted steel to trend marginally upwards by 0.5%/1.0% in FY17F/FY18F, underpinned by economic growth in some regions particularly in emerging market; and 2) we believe steel demand from China would remain subdued at the current level and partly mitigated by fiscal policies in the infrastructure projects, real estates and sales segments.

• Focusing on the Asean region, the South East Asia Iron and Steel Institute (SEAISI) projected steel demand within the Asean-6 is expected to grow healthily at 5%-6% p.a. and steel demand consumption is expected to exceed 80mil MT in FY17F and 90mil MT in FY19F. The current steel consumption is partially supplied from the Asean region (~32mil MT) with the remaining imported from other countries such as China. This is in line with our view on the Asean steel outlook remaining positive as we envisaged before, on the back of steadfast demand for steel given that most of Asean countries are in continuous development to achieve developed country status in addition to the Chinese government direct investments like infrastructure projects.

• On the domestic front, Malaysia’s historical steel demand consumption has remained range-bound, ~10.0mil MT for the past 4 years and demand is expected to grow marginally by 1-2%, with a stronger demand for long products compared to flat products (60:40), according to SEAISI. The construction sector contributes the most to overall steel demand in Malaysia, and demand is expected to pick up thanks to the roll-out of mega infrastructure projects like rail-related projects and township development. The CIDB has pointed that infrastructure projects account for 60% of project value in FY16 followed by non-residential (19%), residential (18%) and social amenities (4%). In addition, the renewed push on the “Buy Malaysia Products First” policy and Industrialised Building System (IBS) would be other re-rating catalysts for a stronger domestic steel demand. Both SEAISI and CIDB views endorsed our views on steel volume to grow modestly at 1%/3% FY17F/FY18F, driven by domestic demand particularly infrastructure projects which are expected to kick off by 2H2017.

• Meanwhile, the stable steel demand in the country is supported by local production and imports. Malaysia steel supply production dropped almost 20% YoY in FY16 to 6.5mil MT, attributable to lower utilization capacity and closure of several steel plants in the country. The global excess supply in FY14-15 has hit Malaysia steel players badly due to China dumping its excess supply in Malaysian market which forced Malaysian steel players to lower their production or shut down after facing huge losses. The shortfall was filled largely by imports and partially by reduced exports by local steel players to cater to the local steel demand.
• With the imposition of safeguard duties effective April 2017 till April 2020 for steel reinforcement bar (REBAR) and steel wire rod (SWR) & deformed bar in coil (DBIC), local steel players are expected to increase their utilization capacity to an optimum level while steel imports may fall due to the safeguard duties. The increase in local production would be able to cater to the local steel demand in the coming years.

• The local steel industry would remain positive if: 1) China remains committed to reduce output capacity and steel export; 2) ASP is sustained or further improved driven by demand & supply forces; 3) the escalating cost of doing business is addressed (i.e. raw materials & labour issues); and 4) the policy and enforcement imposed by the government such as safeguard duties and to require local buyers to procure locally steel products.

• We maintain our OVERWEIGHT stance in this sector with BUY recommendations on Ann Joo Resources (FV: RM3.86) and CSC Steel Holdings (FV: RM2.14).

Source: AmInvest Research - 6 Nov 2017