• Still OVERWEIGHT. The sector’s risk-reward profile should remain tilted towards the upside, underpinned by easing inflationary pressure, ongoing supply tightness in global aluminium supply (notwithstanding the potential relaxation of COVID-19 measures in China), which should result in higher demand for hard commodities. Press Metal (PMAH) remains our sector Top Pick, as it is a proxy to the low carbon-producing aluminium smelters in ASEAN, and is set to benefit from the structural demand shift towards Asian smelters – the European facilities being hampered the energy crisis there.

• Aluminium. London Metal Exchange (LME) aluminium prices have undergone a near-term rebound QTD (4Q22), rising 14% to USD2,447/tonne from USD2,155/tonne as at 30 Sep, following the change in market expectations on the monetary policy. This also factors in LME’s decision not to ban Russia-produced aluminium, which could potentially flood the market with ample supply, resulting in lower ASPs. Nonetheless, the current YTD price of USD2,727/tonne is still 10% higher than 2021’s USD2,476, and remains well above our 2022 assumption of USD2,450. In the near term, we expect LME aluminium prices to trade within USD2,300- 2,500/tonne with the risk-reward tilted towards the upside, underpinned by: i) Low aluminium inventory levels globally; ii) a pick-up in aluminium adoption from the renewable energy (RE) and EV sectors; iii) the potential relaxation of COVID-19 containment measures in China.

• Cement. Average bulk cement ASPs were at MYR351/tonne in November (+14% MoM) due to seasonal factors, as the monsoon season may hinder cement production and push ASPs up. Average cement production levels remain healthy – 9M22 production totalled 1.6m tonnes vs the pre- pandemic (9M19) average of 1.3m tonnes, as demand rose following the full reopening of the economy. However, the increasingly tough operating conditions, ie labour shortages and cost pressures, since 2Q22 have led to a downtrend in cement production.

• Sector outlook. We believe cement makers under our coverage should be able to maintain their ASPs at the current levels, as the cost pass-through (+12% to-date on average) mechanism implemented still lags behind the over 100% YTD spike in coal prices. We keep our cautiously optimistic view on the cement sector, underpinned by favourable tailwinds ranging from the recent 23% correction in coal prices (accounts for c.50% of total production costs), as well as a gradual pick-up in construction activity which should pave the way for sustainable demand growth. For PMAH, we believe the ongoing tight global aluminium supply, the company’s own proactive hedging policy (leading to earning certainty), as well as the favourable alumina-to-aluminium cost ratio should continue to underpin its 2023F 17% earnings growth trajectory.

• Key sector downside risks: Decline in LME aluminium prices, higher- than-expected raw material costs, lower-than-expected cement ASP, and lower-than-expected cement production.

Source: RHB Research - 13 Dec 2022