Highlights

We  walked  away  from  the  recent  steel  sector  conference, with  a  neutral  feeling  about  the  sector,  due to  the persistent overcapacity  issue  in  China  (the  world’s  largest  steel producer),  which  will  likely  cap  fortunes  of  local  steel producers.

Malaysian  Iron  and  Steel  Industry  Federation  (MISIF) projects  apparent  steel  consumption  in  Malaysia  to  grow moderately  for the next 3 years, at 3-6% p.a. to 10.5m mt in 2014, 10.9m mt in 2015, and 11.3m mt in 2016.

However,  the  decent  growth  in  apparent  steel  consumption will  unlikely  improve  the  fortunes  of  local  steel  producers, given  the persistent overcapacity  in China

Various  measures  implemented  have  yet  to  show effectiveness,  hence,  MISIF  has  recently  tabled  a  series  of requests  to  the  Ministry  of  International  Trade  and  Industry (MITI)  and these  include:

1.  Preliminary anti-dumping  margins during  investigation;

2.  An  independent  Trade  Measure  Commission  to  be formed;

3.  Restrict new added  capacity;

4.  Government  to  insist  companies  to  buy  Malaysia  made steel;

5.  Implementation  of the CIBD  amendment  act ;

6.  Implementation  of subsidies removal  gradually ;  and

7.  To  reinstate  a  5%  most  favourable  nation  import  duty for long  products and maintain the 20% for flat products  until 2018.

Catalysts 

• China  decides to further  stimulate its economy;
• More  effective  measures  introduced  by  the  Chinese  authority to curb steel capacity ; and
• Potential trade action on  steel dumping activities .

Risks

• Overcapacity  in China remains over  the longer  term; and
• Volatile  input  prices,  making  the  sector  a  play  on  short -term potential price trend.

Forecasts

• No changes

Rating

Neutral Steel sub-segment

• Negatives  – Overcapacity  results in volatile  earnings.
• Positives  - Potential trade action on  steel dumping  activities

Valuation

• Maintain  SELL  call  on  Ann  Joo  with  TP  of  RM0.97  and  a HOLD  on CSC Steel with a TP of  RM1.12.

Source: Hong Leong Investment Bank Research - 12 Nov 2014