• Subdued Demand Had a Dampening Effect on Metal Prices, Leading to Its Decline in 2H2023.
   
• We foresee a rebound in metal prices in 2024 to be driven by an expected US Fed policy rate normalization and recovering demand. That said, positive market sentiment is expected to arise from moderation in inflation condition, the Fed's interest rate cut, and enduring supply-demand dynamics.

• Notwithstanding that, the sector remains a ‘NEUTRAL’ driven by global headwinds that are still emerging and unfolding.

Stagnant Metal Prices in a Weak Market. We observed a downward trend in the movement of metal prices specifically for aluminum, alloys, and steels throughout the 2H2023. This decline can be attributed to a myriad of factors and influences that significantly impacted market conditions, and therefore affecting the business performance for metal companies under our coverage namely Press Metal, Ann Joo Resources, OM Holdings and PMB Technology. Ferrosilion (FeSi), Manganese alloys (Mn Alloys) and Silicon metal prices showed double digit declines by 15.3%/14.2%/10.9% YoY respectively compared to 1H2023, in tandem with a 15.0% decline in steel price. Note that the steel industry was experiencing turbulence during 2H2023 as it was weighed down by unfavourable supply-demand imbalance following challenging global industry landscape and sluggish China’s steel sector. Nonetheless, aluminum experienced a marginal decline (-5.0% YoY) from 1H2023. Although aluminium price was affected by weak demand, the price was supported by tight inventory supply. All in, the metal industry was weighed down by weak sentiment following inflationary pressure with a knock-on impact on demand.

Silver Linings Emerge with Federal Rate Adjustment. We foresee a rebound in metal prices in 2024, to be driven by anticipated adjustment in US’s policy rate and a subsequent recovery in demand. Our economist projects a 100-basis point cut in the US Fed policy rate in 2024 from the current range of 5.25%-5.50%. We anticipate a gradual improvement in market sentiment based on reduced inflationary pressure, diminished expectations of the Fed interest rate hike, and the long-term favourable supply and demand dynamics. With the expected recovery in demand, we anticipate a rebound in average selling prices (ASPs), leading to improved business prospects, including enhanced production and potential business expansion. Aluminum demand is expected to be balanced against tight physical supply. The closure of smelters relying on fossil fuels, particularly coal, due to mounting environmental concerns, coupled with Western sanctions against Russian aluminum products, are poised to impose constraints on the supply chain, thereby maintaining strength in aluminum prices. Ferroalloy prices should be lifted by the recovery in demand following the reversal of the US interest rate cycle. However, we beg to differ on the steel market. Despite the reopening of economic activities in China, demand for steel products continues to be underwhelmed due to excessive production and sluggish property market. Additionally, the implementation of construction and infrastructure projects in China, as well as domestic infrastructure, has not been as robust as initially expected. Despite recent stimulus efforts by the Chinese government, they have proven insufficient to bolster the property and infrastructure sectors in China, thereby prolonging existing debt-property issues. Additionally, positive impact stimulus packages are constrained by overcapacity challenges in steel production.

A mixed outlook underpins our ‘NEUTRAL’ call on the sector. We have BUY call for Press Metal (RM5.43), Scientex (RM4.15), OMH (RM2.11) and Wellcall (RM1.90), a HOLD call for Hextar Global (RM0.72) and KPS (RM0.77), and a SELL call for PMB Tech (RM1.11). It is a Not-Rated for Ann Joo Resources.

Source: BIMB Securities Research - 19 Jan 2024