We are maintaining a Neutral rating on the sector. The steel millers were hit by the slower than expected recovery in steel prices as well as expensive inventories that eroded the steel millers' margins. However, we believe the situation will ease as the mills begin clearing their expensive inventories and replenish them with the current lower price raw materials. That said, steel prices will still predominantly be determined by China's steel output growth, which has shown a slower growth lately due to the oversupply of steel in China from the lacklustre demand in the international market. Nonetheless, we expect to see a brighter prospect for the overall industry as it moves into the 3Q12 as more construction awards under the Economic Transformation Programme (ETP) and 10MP projects are announced. This is because steel makes up c.20% of the total property development costs. This development will help boost sales orders for both Ann Joo Resources (AJR, MP; TP:RM1.62) and Malaysia Steelworks (Masteel, MP; TP:RM1.08), which are under our coverage. We prefer or AJR over Masteel for the former's well managed production and proven track record. 

Steel mills to improve as more construction activities kick in. Most steel mills are still being hit by the slower than expected recovery in steel prices in the previous quarter although we expect a brighter prospect for the overall industry as it moves into 3Q12 as more construction awards under the ETP and 10MP projects are announced. This is because steel makes up c.20% of total property development costs  and should help boost sales orders for both AJR and Masteel.

Sales volume still muted.  In the past few months, steel mills were hit by (1) weakened steel prices and (2) expensive inventories that eroded the millers' margins. Nonetheless, we believe this situation should ease as the mills begin to clear their expensive inventories and replenish it with the current lower price raw materials. That said, steel prices are still predominantly determined by China's steel output growth, which has shown a slower growth lately as its government puts greater focus on the  consumers rather than building projects. This is also further exacerbated by the oversupply  of steel in China due to the lacklustre demand in the international market as the long-drawn European crisis caused customers to delay their purchases. 

Keeping NEUTRAL rating.  Although we are somewhat positive on contract flows, we are maintaining a  NEUTRAL rating on the sector as the steel millers are still vulnerable to the current volatility of raw material prices, which may erode their margins. We prefer Ann Joo Resources (MP, TP: RM1.62) over  Malaysia Steelworks (MP, TP: RM1.08)  for the former's well managed production and proven track record.