• Following the decision by the Trump administration to impose hefty tariffs of 25% and 10% on imported steel and aluminum respectively last week, share prices of Ann Joo Resources (AJR) and Press Metal fell by 9% and 14% respectively over the last two trading days.

• Assuming the tariffs are to take effect, theoretically, steel and aluminium in the US domestic market will trade at a 25% and 10% premium to international prices. This could prompt steel and aluminium US producers to restart their idle capacities (which are not commercially viable based on the current international prices of steel and aluminium).

• We estimate that the US idle steel production capacity currently stands at about 35-40mil tonnes per annum, translating to about 30% of the total installed steel production capacity in the US of 120mil tonnes per annum. On the other hand, the US idle aluminium production capacity stands at about 1mil tonnes per annum, translating to about 50-60% of the total installed aluminium production capacity in the US.

• Assuming the US idle steel production capacity is to be activated to supply to the US domestic market, this will result in excess steel supply of 35-40mil outside of the US (as non-US steel producers are now unable to export this quantity of steel to the US). This 35-40mil tonnes of excess supply in the system will dampen prices. As an indication as to how much it will dampen the prices, in 2017, steel prices surged 20% on the curtailment in China of steel production capacity of ~100mil per annum. The reverse will happen.

• Similarly, assuming the US idle aluminium production capacity is to be activated to supply to the US domestic market, this will result in excess aluminium supply of 1mil outside of the US (as non-US aluminium producers are now unable to export this quantity of aluminium to the US). This 1mil tonnes of excess supply in the system will weaken prices. As an indication as to how much it will weaken the prices, in 2017, aluminium prices jumped 25% on the announcement (just an announcement) of production cuts of 3.6mil tonnes per annum in China. Again, the reverse will happen.

• The Trump administration has thus far faced tremendous backlash on these proposed steel and aluminium tariffs and we believe it is premature to conclude that these are a done deal. As such, we maintain our steel and aluminium price assumptions of RM2,140/tonne and US$2,150/tonne in 2018 and OVERWEIGHT rating on the Building Material sector, with a BUY call for Ann Joo Resources (FV: RM4.34) and HOLD call for Press Metal (FV: RM3.64).

Source: AmInvest Research - 6 Mar 2018