- The Edge Malaysia reported that industry players have been urged to consolidate in view of the continued oversupply of steel capacity that mainly comes from China. By extension, there has been a rising influx of steel round bars. Imports of the material into Malaysia rose by more than ten times to 447,212 tonnes in 2013 from 40,393 tonnes in 2009. Based on the report, other key issues highlighted by local industry players include:-

- (i) An increased level of imports due to the liberalisation of tariff duties via free trade agreements; (ii) excess capacity from Chinese steel producers are unlikely to recede in the near term, exacerbated by huge losses and associated financing cost; (iii) rising input cost , such as the 20% hike in natural gas price to RM19.32/ million British thermal unit (MMBtu). According to a report by the Malaysian Iron and Steel Industry Federation (MISIF) in mid-April, 5 MMBtu to 7 MMBtu of natural gas consumed for each tonne of steel making/rolling activity will translate to an additional cost of RM130 mil p.a. or a 4% increase in total production cost; and (iv) imposition of goods and services tax (GST) of 6% (estimated to be between 10% and 20% of total operating cost).

- Amid a still sticky cost structure, we acknowledge that Chinese imports represent a major challenge for the local steel industry. Hence, the move to consolidate and create larger entities among the domestic steel supply chain is one way to mitigate the challenging operating environment. This may include tie-ups with foreign partners to produce higher-end products.

- We do see some M&A prospects emerging in Malaysia, which has among the largest capacity for semi-finished steel within ASEAN along with a developed distribution network and relatively attractive power rates. As replacement costs rise for new-build mills, this could attract foreign suitors looking for immediate exposure to the region via brownfield mills.

- But we believe a key re-rating catalyst for the steel sector in the near-term is the implementation and execution of select measures to curb the rising influx of cheap steel imports. On 20 Feb, the Malaysian government imposed anti-dumping duties of 3%-25% on steel wire rods from certain countries.

- These measures, in our view, have its merits. This holds true particularly for the long-steel industry which have been liberalised and largely do not enjoy any protection (e.g. import duties) against dumping activities unlike certain flat products. Furthermore, some of our ASEAN neighbours have already implemented some form of anti-dumping measures to protect their domestic steel players.

- Ann Joo Resources remains as our top pick for leverage to any tangible pick-up to the steel sector. As it is, the improving efficiencies and flexible input mix at its blast furnace puts the group in a better position to weather any incremental increases in costs. 

Source: AmeSecurities