The 2.25 sen/kWh reduction in electricity tariff believed to be  applicable to West Malaysia’s industrial users  may offer temporary  relief to local steel mills  in particular.  Maintain OVERWEIGHT on  the  basic materials sector with a selective BUY. As the new tariff only lasts for four months,its  savings  may  be  offset  by  prolonged  competition  from  China’s imported steel. Thus, we make no changes to our earnings estimates. Power  tariff  reduction.  The  Energy,  Green Technology  and  Water Minister Datuk Seri Dr Maximus Ongkili said power tariffs  for consumers in West Malaysia will be reduced by 2.25 sen/kilowatt-hour (kWh) from 1 Mar  to  30  Jun  2015.  While  basic  materials  players  we  spoke  to  are unsure  of  the  actual  quantum  of  tariff  reduction,  the  official announcement  by  the  minister  and  our  channel  checks  suggest  that industry users may enjoy the same quantum of savings.

Cheer for West Malaysia’s steel boys. Local mills are mostly operating electrical arc furnaces (EAF),  which consume ~600kWh  of electricity to produce a  tonne  of  billets  and  120-150kWh  to  manufacture  a  tonne of bars or wire rods from billets. The new electricity  tariff will translate  into savings of up to MYR13.50/MYR3.38 per tonne of upstream/downstream steel  production  respectively.  The  net  savings  for  Ann  Joo  Resources (AJR  MK,  TRADING  BUY,  TP:  MYR1.37)  are  MYR2.1m  for  FY15  –relatively  low,  as  its  mini  blast  furnace  consumes  only  ~300kWh  per tonne of billet production.  That said,  four months  of tariff  reduction may save  (net)  Lion  Industries  (LLB  MK,  NEUTRAL,  TP:  MYR0.52)  up  to MYR6.1m  and  Malaysia  Steel  Works  (MSW  MK,  BUY,  TP:  MYR1.26) around  MYR2.7m,  both  in  FY15.  Nevertheless,  we  prefer  to  keep  our earnings  estimates unchanged for  local steel mills as  the  savings  from the  power tariff may be offset by lower profit margins. This is because the  Ministry  of  International  Trade  and  Industry  (MITI)  recently terminated  its  investigation  into  the  import  of  steel  bars  from  China, which suggests  that the  fierce competition from imported steel  could be prolonged.

Negligible  impact  on  other  basic  materials  players.  While  cement production  consumes  100-130kWh  of  electricity  for  every  tonne  of cement,  tariff  net  savings  for  four  months  would  only  amount  to MYR4.5m,  or  1.1%  of  Lafarge  Malaysia’s  (LMC  MK,  NEUTRAL,  TP: MYR10.00)  FY15  earnings.  As  for  other  basic  materials  players  under our coverage,  the cost savings  have no major impact on  their financialsas they consume less power. While Sarawakian players like Press Metal (PRESS MK, BUY, TP: MYR5.75)  are power hungry since  they  operate aluminium smelting plants, the tariff reduction does not apply to the  Land of the Hornbills, particularly in Press Metal’s case, as the company has aseparate power purchase agreement with Sarawak Energy.

Source: RHB