Stock Name: CSCSTEL
Company Name: CSC STEEL HOLDINGS BERHAD
Research House: RHB

Building materials
Maintain neutral: We believe the outlook for the global steel sector in 2011 is challenging due to the slowing demand in China and less robust construction activities in the developed countries. Steel demand growth in China is expected to slow down with credit tightening measures and policies to curb speculation in the property sector.

Spot iron ore prices have been picking up recently due to supply disruptions in India. This has resulted in a 7% to 8% rise in quarterly benchmark price for iron ore in 1Q2011. In addition, scrap prices have also been on an upward trend, reaching US$430 (RM1,332)-US$440/tonne now. Owing to higher raw material costs, most large international steelmakers have raised their selling prices for January and February deliveries next year.
The potential hike in natural gas tariffs will hurt the margins of direct-reduced iron producers, while the potential hike in electricity tariffs will hurt the margins of upstream steelmakers in Malaysia as all of them produce steel via the electric arc furnace route. Higher electricity cost will also affect the margins of cement producers.

We project domestic cement consumption to grow by 6% in 2011 (vis-''-vis flat in 2010), underpinned by key on-going and potential large-scale infrastructure projects, robust property development activities, as well as potential mega privatised property projects on federal land such as the 2,680-acre Rubber Research Institute land in Sungai Buloh and the 400-acre Royal Malaysian Air Force land in Sungai Besi.
For steel, the risk of an oversupply situation in China and steep contraction in global steel consumption would weigh down on international steel prices. For cement, the risks are delays in the rollout of projects, steep rise in energy prices, and potential price war in the industry when new capacity is added in end-2012.

Overall, we are maintaining our neutral call on the sector. Valuations for the steel sub-sector are based on one-year target forward price-earnings ratio (PER) of 10 times, while for the cement sub-sector, valuations are based on one-year target forward PER of 13 to 16 times. ' RHB Research Institute Sdn Bhd, Dec 27


This article appeared in The Edge Financial Daily, December 28, 2010.