A Quick Look At Southern Steel And The Steel Sector

April 2nd. On the Financial Edge.

• OSK says worst is over for steel mills
  Written by Financial Daily
  Thursday, 02 April 2009 11:13
  
  OSK Research strongly believes that the worst is over for steel mills despite the gloomy outlook for the sector and poor earnings visibility of steel mills.
  
  “Reiterate overweight considering the strong asset backing of the local steel mills that are trading in the range of 0.15 times to 0.7 times price over net tangible asset, which are mostly below their historical trough level at -1 standard deviation. We think that the long steel companies under our universe at least justify a neutral or buy recommendation,” it added.
  
  However, the research house reckoned that steel mills might be at risk of running into another loss-making quarter or two before returning to the black.
  
  “We think the potential cumulative losses are limited given the small downside on steel prices from current levels. We are keeping our buy recommendations on Lion Industries (TP: RM1.60), Southern Steel (TP: RM1.82), Masteel (TP: RM1.03) and Kinsteel (TP: RM0.55) but rate Ann Joo (TP: RM1.12), and Perwaja (TP: RM0.70) as neutral,” OSK added.
  
  Bloomberg recently reported that Chinese steelmakers have asked iron ore suppliers to temporarily cut prices by 40% until an annual contract price agreement is reached.
  
  OSK said based on the old annual contract price for iron ore and coking coal that was supposed to end Tuesday, the blast furnace (BF) cost structure has become much more expensive compared with electric arch furnaces (EAF), which enjoy cheap input from a sharp plunge in scrap metal prices.
  
  “Assuming the news is correct, the new raw material price will bring BF production cost only slightly higher than the 2007 level, thus improving the competitiveness of iron ore-based producers. The new price mechanism is also timely Ann Joo’s mini-BF project, as the new costing would render its investment in hot metal processes economically viable upon commissioning in 1QFY10,” the research house said.

April 17th. On the Star Business. Steel sector shows early signs of recovery, prices improve

• PETALING JAYA: Long product steel millers will soon get back on the road towards profitability as demand and prices have rebounded from their lows of recent months.
  
  Malaysia Steel Works (KL) Bhd (Masteel) managing director Datuk Seri Tai Hean Leng said prices of long steel products had bottomed out from their lows in December and January after rebounding 10% to 15%.
  
  “While prices are expected to remain range-bound until the fourth quarter, demand has improved by 15% in the past month,” he told StarBiz in an email reply.
  
  Inventory levels in the steel mills will continue to fall from all-time highs in November and December last year.
  
  One of the factors in this recovery is the significant withdrawal by China, a major player, from the regional export markets.
  
  China’s export volume for steel products had been reduced to about 5% of the country’s gross output as its domestic demand surged upon implementation of its US$586bil stimulus package, he said.
  
  According to a Bloomberg report, China’s steel exports fell almost 55% in the first quarter to 5.14 million tonnes from the corresponding period last year.
  
  Tai said countries like Turkey and Taiwan, as well as Malaysia would be able to fill the supply gap left by China as these countries enjoyed advantages in pricing and freight costs in their respective regions.
  
  Exports of steel from Malaysia are thus expected to resume and gradually increase.
  
  Masteel expects some price volatility in the second and third quarters, as higher steel prices would face resistance, and prices would fall again as additional supply rushes in to meet demand.
  
  Nonetheless, the worst was over for steel mills, Tai said, adding that demand would pick up substantially in 2010. “We do not expect any write-downs from the second quarter onwards.”
  
  An officer from a big steel mill, who declined to be named, said signs of recovery were visible although the market was still relatively soft.
  
  “Prices have stabilised somewhat, and inventory levels are also being steadily reduced as a result of the de-stocking exercise carried out over the pass few months,” he added.
  
  AmResearch said in a report that steel prices were lifted by huge reduction in global steel production, tighter scrap supplies and further consolidation in the Chinese steel sector.
  
  It cited US steel consultancy Global Steel Dynamics’ expectation that global steel production could drop 14% this year from last year’s levels. In the first two months, global steel production had fallen by 22% to 24%.
  
  The research house also noted that global prices of billets had risen by US$40 per tonne in the last two weeks, suggesting that recovery was gaining momentum as various countries’ stimulus packages, particularly from China, had started to take effect.
  
  OSK Investment Bank analyst Ng Sem Guan said demand and prices of long products had improved on rising construction and property activities.
  
  “China has removed VAT (value-added tax) for flat steel but maintained the 15% to 25% export tax on long products, which is an indication that they are in demand for domestic consumption,” he said.
  
  Nevertheless, steel companies are expected to post one to two more months of losses before showing gradual earnings recovery in the second half. “We expect full recovery to happen in 2010,” Ng said.

27th April, on the Financial Edge.

• Stimulus packages boosting steel demand
  Written by Tony C H Goh
  Monday, 27 April 2009 00:21
  
  KUALA LUMPUR: “Green shoots” appear to have taken a foothold in the global steel industry as demand rises amid the various economic stimulus packages worldwide, but volatility could last until the end of the year, according to analysts and industry players.
  
  “We saw a very drastic drop in demand in the fourth quarter of last year. In December, for example, demand by the market in general dropped by more than 90%,” said local steel maker Malaysia Steel Works (KL) Bhd’s (Masteel) managing director Datuk Seri Tai Hean Leng.
  
  He said the over-correction had led to a sharp decline in stockholdings and prices as production slowed.
  
  “While we have also experienced an increase in demand of around 10% to 15% (since the beginning of the year), the price of steel is still not attractive enough,” Tai told The Edge Financial Daily.
  
  He said although steel billet prices had appreciated as much as 15% in the international market in recent months in tandem with the rise in demand, there was still no clear sign of any significant change in demand locally.
  
  Local steel bars are now priced at around RM1,800 per tonne versus its peak of almost RM3,000 last year, while steel billet is trading at around US$375 to US$385 (RM1,339 to RM1,374) in the international market compared to nearly US$1,000 per tonne in July 2008.
  
  Meanwhile, in a reply to The Edge Financial Daily, Lion Industries Corporation Bhd’s spokesperson said there was some slight improvement in domestic demand, while “there is also demand for export but international prices are still depressed”.
  
  The spokesperson said “inventories have been reduced to match the sales and production level” and it planned “to maintain low inventories”. He added that any improvement would depend on demand and price.
  
  According to a recent report by AmResearch, Ann Joo Resources Bhd, the country’s largest steelmaker by market capitalisation, had received 40,000 to 50,000 tonnes of new orders from the overseas market in the past two weeks.
  
  It was believed to be the company’s biggest order in six months, and Ann Joo had also resumed full production at its plant this month after a two-month shutdown. Exports were expected to reach 50% of its sales this year, up from about 30% in 2008 as Malaysia’s economy slowed, according to AmResearch.
  
  Goldman Sachs Group Inc had recently raised its gross domestic product growth forecast for China to 8.3% this year from 6% previously, attributing the upgrade to the nation’s four trillion-yuan (RM2 trillion) stimulus package.
  
  “Overseas demand at least has shown sign of recovery and the China factor is one of the reasons for the apparent rebound in external demand. The country became a net importer of steel since March,” said an industry analyst from TA Securities.
  
  “While that is a sign that demand is gradually normalising, the volatility is expected to remain until the fourth quarter of this year. But next year could be a good year for steel players if the stimulus packages announced globally are effective,” said Tai.
  
  Last Friday, among the steelma-kers, Ann Joo dropped two sen to close at RM1.65, Masteel rose one sen to 87 sen, Southern Steel Bhd, Malaysia’s second-biggest steel maker, lost two sen to RM1.67. Lion Industries was up 5.5 sen to RM1.05, while Kinsteel Bhd gained 0.5 sen to end at 62 sen.

On Tuesday, 5th May 2009 Southern Steel sees light at the end of the tunnel

• The company hopes to see a modest recovery in the demand for steel products in the second half of this year with the kicking in of stimulus packages both locally and abroad
  
  SOUTHERN Steel Bhd (5665) expects demand for its products to recover in the second half of this year, driven by government measures locally and abroad.
  
  Countries around the world are trying to spend their way out of a recession. Malaysia for instance, is spending money on infrastructure like roads, to revive economic activity.
  
  This is likely to spur demand for steel products like steel bars and wire rods, products made by Southern Steel.
  
  The company's general manager and chief financial officer Koay Chong Beng said the steel industry is due to see some light at the end of the tunnel soon.
  "We hope to start seeing a modest recovery in the second half of this year with the kicking in of stimulus packages both locally and abroad," he told reporters after the company's annual shareholders' meeting in Seberang Prai, Penang.
  
  Steel was one of the commodities hardest hit by the financial crisis.
  
  "Prices and sales volume dropped more than 50 per cent within three months from September to November last year and the crisis badly affected the performance of all the companies within our group in the last quarter of the year," he added.
  
  The plunge in demand meant that its normal stock levels doubled to more than six months. It also bought the stocks when steel prices were high.
  
  As prices fell, Southern Steel had to write down the value of its inventory and it took a RM359 million hit.
  
  The company's chief operating officer Chow Chong Long said Southern Steel is committed to spend RM50 million this year to upgrade its Penang facility.
  
  "Our inventory levels are currently the lowest among the country's five integrated steelmillers.
  
  "Our term loans which total US$25 million (RM88 million) will be fully paid off by August," said Chow.

Last night Southern Steel announced its earnings.

Revenue plunged and losses were huge.

Of course, some would argue that the market is already discounting this 'bad; news and would say that the losses were already as expected. :p2

Of course, some would also say that the way the market is discounting the bad news is rather excessive and that the massive run in some steel stocks simply isn't justifiable. :p2

The following chart shows the massive price movement in Southern Steel recently.



How now brown cow?