• Lower Interest Rates to Drive Growth in Metals Demand and Industrial Manufacturing. Following the recent FOMC meeting, where the Fed projected two rate cuts in 2025 due to high inflation, we expect this to positively impact metals demand and industrial manufacturing. Lower borrowing costs should encourage investment in key sectors like infrastructure, construction, and manufacturing, which are major users of metals such as steel, aluminium and copper. This will help reduce financing costs, boost demand for raw materials, and ease cost pressures on manufacturers, potentially improving margins. While the full effects may take time, the overall environment of lower rates is expected to support growth in the metals and industrial sectors in the medium term.

• Aluminium Leads Metal Price Gains in 2024 Amid Mixed Market Trends. Among the metals under our coverage - aluminum, steel, ferrosilicon, silicon manganese and silicon metal, only aluminum saw significant growth in 2024, rising 6.5% YoY to an average of USD 2,447/MT, driven by strong demand and LME and US sanctions on Russian metals. Besides that, silicon metal price edged up 1.6% YoY to USD 976/MT due to supply disruptions of its raw material, manganese ore from South32's GEMCO unit. In contrast, steel and ferrosilicon prices remained subdued, impacted by weak steel demand from China. Meanwhile, subdued and silicon metal price was due to lower operating rates following seasonal effects and rising costs in silicon production.

• Domestic Investment Surge and Construction Growth to Benefit Steel Players. The Malaysian steel sector is poised for growth, driven by key infrastructure projects such as LRT3 Phase 3 and the Sabah-Sarawak Link Road along with robust demand from the real estate sector, particularly residential and industrial parks projects. Projects, outlined in PIKAS 2030 and the National Budget 2025 are also expected to boost domestic steel consumption, particularly for long steel products like rebars and structural steel as well as flat steel for construction finishes. With resilient demand from these sectors, local steel producers stand to benefit from increased order volumes and potential price hikes. However, downside risks persist despite the rebound in domestic investment. Rising raw material costs such as iron ore and scrap as well as global supply chain disruptions may pose challenges, particularly for players without secured supply agreements. Additionally, competition from low-cost imports could further pressure local manufacturers.

• Domestic Demand Shows Promise but Steel Exports Continue to Struggle. China’s steel market faces a subdued outlook largely due to the ongoing property crisis. The downturn in the property sector continues to weigh heavily on overall steel consumption, with the prolonged slump in property-related demand limiting growth prospects. Although temporary stimulus measures may provide some relief, the structural challenges within China’s property market are likely to dampen steel demand in the short term. We expect a modest rebound in China’s steel demand in 2025, contingent on stabilization in the property sector. While rescue measures may ease the contraction in housing sales and new starts, they are unlikely to fully address the underlying issues. Government stimulus efforts and infrastructure spending could boost demand in other sectors, but the property market will likely continue to suppress steel demand, especially for construction-related products.

• EV Growth and Solar Expansion Lead the Way for the Aluminium Demand. Aluminum demand in 2025 is expected to remain strong, driven by growth in the solar and electric vehicle (EV) segments. The automotive industry, particularly EVs, is a key driver due to the increasing use of lightweight aluminum. Our projections estimate that EVs will account for 3.5% of registered vehicles in 2025, up from 2.5% currently. This growth is supported by Malaysia's target for EVs to make up 20% of annual vehicle sales by 2030. Globally, China’s EV market is expanding, banking on improving charging infrastructure and growing market demand across the cities. The China Passenger Car Association reports of rising retail sales of new energy vehicles, from which EVs accounted for a major proportion. Additionally, sectors like cleantech and solar energy are expected to boost aluminum demand, driven by continued demand growth in renewables.

• Widening Supply Capacity Gap in 2025 amid Capacity Constraints and Delays. The supply of global aluminum market is likely to end the year in a deficit, with the supply gap potentially widening further in 2025. This is primarily due to China’s aluminum production nearing its annual capacity cap of 45mn tons, exacerbated by increased output in the Yunnan province, which has benefitted from abundant rainfall in 2024. This rainfall has enabled aluminum producers in Yunnan to operate at full capacity, leveraging the province’s hydroelectric power. However, production outside China will be shaped by potential restarts in Europe and Brazil, although new aluminum plants in Indonesia and India are facing potential delays, due to environmental concerns. As such, given this imbalance in demand and supply in aluminum, this could potentially push aluminum prices higher.

• Alumina Capacity Expansion to Alleviate Price Strain. The global alumina market faced significant supply disruptions in 2024, leading to elevated prices due to concerns over bauxite availability and increased demand from Chinese smelters in 3Q24. However, with new alumina capacity coming in China, Indonesia and India, supply shortages are expected to ease in 2025, potentially alleviating some pressure on prices. Despite this, downside risks remain in alumina supply. However, producers with higher self-sufficiency in alumina and better control over power costs such as Press Metal are likely to be less impacted by supply chain risks.

• Press Metal: Riding the Aluminium Recovery Wave. Among the companies under our coverage, Press Metal (PMAH) stands out as our selected buy stock. We have an optimistic outlook on the aluminium sector, supported by expectations of a recovery in aluminium demand, driven by a rebound in average selling prices (ASPs) and increasing global awareness of sustainable and low-carbon industries. Press Metal stands to benefit from several key factors including a hike in global aluminium prices, the removal of the 13% tax rebate on aluminium exports by China and rising demand for non-China aluminium. Additionally, the company is well-positioned to capitalize on the potential spillover effects of heightened US-China trade tensions, as buyers diversify supply chains. While risks such as a potential alumina supply shortage and rising alumina prices remain, PMAH’s joint venture arrangements and strategic sourcing initiatives are expected to help mitigate these challenges. Overall, PMAH’s strong position in the global aluminium value chain coupled with favorable sectoral and macroeconomic tailwinds, underpins our positive outlook on the company.

• Sustained Outperformance Amid Market Volatility. The chart below showed that PMAH consistently outperforms the weighted average EBITDA margin of its global peers across the observed period. While the peer average experienced significant fluctuations, notably a sharp decline in 2022-2023, PMAH 's margins remained relatively stable. Looking ahead, Press Metal's projected EBITDA margins for 2024E and 2025E are expected to exceed the peer average. This growth is driven by favorable market dynamics, including rising aluminium prices, increasing demand for sustainable lowcarbon aluminium and its strong positioning within the global aluminium supply chain. Additionally, the company’s strategic initiatives, such as joint ventures and diversified sourcing, provide a competitive edge.

• Maintain NEUTRAL in the Industrial sector. We have a NEUTRAL outlook for the sector as potential drivers such as increasing demand in key industries and new capacity additions could support growth. However, external factors including uncertainties surrounding Trump’s trade policies and geopolitical tensions could disrupt the overall industry, creating volatility in the short-term. While there are growth opportunities, the broader macroeconomic and trade policy risks may weigh on sector performance. We have a BUY call for Press Metal (TP: RM6.45), OMH (TP: RM1.61) and Wellcall (TP: RM1.87). A HOLD call for Scientex (TP: RM4.50) and Hextar Global (TP: RM0.98). Meanwhile, a SELL call for KPS (TP: RM0.53), PMB Technology (TP: RM1.11) and Ann Joo Resources (RM0.54).

Source: BIMB Securities Research - 8 Jan 2025