We maintain our OVERWEIGHT rating on the sector, supported by expectations of stable metal prices with an upward trend, which should drive margin normalisation for industry players. While the impact of recent stimulus measures from China on steel prices has been minimal, we expect a gradual recovery in steel demand in 2025 following four years of stagnation or decline. This recovery will likely be fuelled by a stabilising property market, additional stimulus benefiting other sectors, and improving consumer sentiment. Nonetheless, the local demand for ferrous metals and their value-added products are well driven by the roll-out of major local infrastructure projects. Meanwhile, water pipe makers stand to gain from the revival of water projects locally following water tariff hikes that strengthen cash flows of water operators. Our sector top picks are PMETAL (OP; TP: RM6.00) and ENGTEX (OP; TP: RM0.81).

Watching for China's demand rebound to lift aluminium prices. Aluminium prices have fluctuated between USD2,400/MT and USD2,600/MT over the past two months, despite expectations of firmness driven by unexpectedly strong consumption in China earlier in the year. Strong consumption in China during the year's initial months provided an early boost, while demand outside China has been supported by the expansion of renewable energy projects and increased electric vehicle (EV) production.

Nevertheless, concerns linger regarding the sustainability of Chinese demand as it relies heavily on the recovery of the infrastructure and property sectors, both of which remain uncertain. On the supply side, environmental pressures have led to the shutdown of coal-powered smelters, while Western sanctions on Russian aluminium producers are adding to supply constraints.

These factors are likely to influence market dynamics in the near term.

We project a higher average aluminium price of USD2,450/MT in CY25 vs. USD2,420/MT in CY24, while we expect SiMn prices to remain firm at above USD950/MT for CY25 vs. USD980/MT in CY24 as ore price remains firmer. Conversely, we expect prices of FeSi of USD1,350/MT in CY25 against USD1,280/MT for CY24.

Stable steel prices with upward bias. China's steel demand is expected to grow modestly in 2025 after four years of stagnation or decline driven by a stabilising property market, additional stimulus supporting other sectors, and improving consumer sentiment.

While exports provided significant support in 2024 (+19% YoY), steelmakers may face pressure in 2025 and beyond due to rising anti-dumping investigations with a more pronounced impact likely in 2026. The industry's poor profitability has already led to production cuts and is paving the way for consolidation as many steelmakers face the risk of bankruptcy. If capacity limits are enforced, utilization rates could improve, potentially boosting Chinese steel prices in 2025.

On the local front, the demand for steel should improve along with the roll-out of mega public infrastructure projects such as the Mutiara Line of Penang LRT, Kuching ART and MRT3. The good news is that stable steel prices translate to stable steel product prices, reducing earnings volatility of steep product producers including ENGTEX and ULICORP (MP; TP: RM1.86).

Pipe makers in a bright spot. The sentiment towards water-related stocks has improved following water tariff hikes and gradual progress in water infrastructure development. Also, the recent surge in the number of data centres setting up in Malaysia will further push the government to address water infrastructure issues, as reliable water supply is crucial for cooling these facilities.

We believe a pick-up in pipe replacement orders will be kicking in as early as next year as the tendering and funding process among Pengurusan Aset Air Bhd (PAAB), water operators, and contractors typically takes at least six months to be finalised.

Encouragingly, there have been several positive developments, including: (i) PBA (Not Rated) planning to complete three water pipeline projects worth RM189m over the next two years, (ii) PAAB building two new water treatment plants in Seberang Perai worth RM1b, and (iii) Sarawak's allocation of RM1.08b for water pipe upgrades.

Several mega infrastructure projects are set to be rolled out in CY25, including: (i) Sungai Perak Raw Water Transfer Scheme to Penang (SPRWTS), (ii) Langat 2 water treatment plant, and (iii) Sungai Rasau phase 2. Based on our estimates, the total value of the water pipe components for these projects is approximately RM1.1b.

Our sector top picks are:

1. PMETAL given: (i) structural cost advantage over international peers given its access to low-cost hydro-power secured under four long-term PPA contracts ending between 2034 and 2040, (ii) strong secured alumina supply with stakes in two alumina miners, i.e., Japan Alumina Associate (40%) and PT Bintan (25%) which supply 40% of its requirements, and (iii) green investment appeal as a clean energy source producer.
2. ENGTEX given: (i) the huge potential in the water pipe replacement market locally, (ii) its dominant market position in both large-diameter mild steel (MS) pipes and ductile iron (DI) pipes, and (iii) its strong earnings visibility underpinned by significant order backlogs and a strong pipeline of new projects.

Source: Kenanga Research - 10 Jan 2025