We maintain our NEUTRAL rating on the sector. We expect stable prices with an upside bias for aluminium, ferrosilicon (FeSi) and silicon manganese (SiMn). The demand outlook for these commodities is unfavourable due to economic challenges in China, partially cushioned by supply constraints and softening input costs. Nonetheless, we sift out OMH (OP; TP: RM2.07) as our top sector pick as we believe the selloff on the stock has overshot its fundamentals, particularly, it being a low-carbon producer fuelled by hydropower. We also see a bright spot in cable support system maker ULICORP (OP; TP: RM2.18) on the back of a construction boom driven by both private-sector building jobs and the impending roll-out of mega public infrastructure projects.

Stable price outlook with an upside bias. We project a slightly higher average aluminium price of USD2,450/MT in CY24 vs. an estimated USD2,262/MT in CY23, while slightly lower average FeSi and SiMn prices of USD1,350/MT and USD950/MT in CY24 vs. an estimated USD1,450/MT and USD968/MT in CY23, respectively. We see slightly better aluminium prices after a 2- year lull, but remain cautious on FeSi and SiMn prices given the protracted downturn in China’s steel sector. Generally, the demand outlook for these commodities is unfavourable due to economic challenges in China, partially cushioned by supply constraints due to the decommissioning of fossil fuel-powered smelters (especially by coal) due to stricter environmental requirements coupled with Western sanctions against Russian aluminium. Overall, we expect FY24 earnings growth for aluminium smelter PMETAL (MP; TP: RM5.00) to be driven by better aluminium prices while FeSi and SiMn alloy producer OMH by a higher production volume.

We prefer steel product players to steel players. Meanwhile, we do not expect a significant recovery in steel prices in CY24, given the economic challenges in China, which is the largest steel producer and consumer in the world. However, we see a bright spot in local steel product makers including ULICORP and ENGTEX (OP; TP: RM0.77) which prospects are buoyed by: (i) a revitalisation of the local construction sector backed by both private-sector building jobs and the impending roll-out of mega public infrastructure projects (including water projects), and (ii) the reduced volatility in the cost of steel input which brings about better margin and hence earnings stability. For instance, in Nov 2023, steel prices barely moved when the local long steel price inched up to c.RM2,673/tonne (+2% MoM) while local flat steel price increased to RM3,237/tonne (+1% MoM).

Our sector-top picks are:

1. OMH given: (i) its structural cost advantage over international peers given its access to low-cost hydropower under a 20- year contract ending 2033, (ii) its strong growth prospects underpinned by plans to expand its capacity by 30%-36% to 610,000-640,000 metric tonnes per annum over the medium term, and (iii) its appeal to investor given its clean energy source.

2. ULICORP given: (i) the strong demand for its cable support system products on the back of a construction boom in both private space (data centres, warehouses, hospital projects, etc) and impending public mega projects (i.e. MRT3, RTS, ECRL, etc), (ii) improved pricing power of players following the industry consolidation during the pandemic, i.e. weak players shutting down permanently, and (iii) its growth driven by two new plants that will boost its capacity by 40%.

Source: Kenanga Research - 29 Dec 2023