Steel players should consider restocking soon, say industry players

KUALA LUMPUR: On the back of rising iron ore prices and an expected increase in demand for steel, industry officials say steel players should think about restocking because raw material prices are expected to continue to climb.

Because of the increase in iron ore prices, those that kept a high inventory would benefit at least in the coming quarter, said an analyst, adding that restocking activities among steel producers do not appear to have taken place yet.

"Based on past performance, players such as Southern Steel Bhd and Lion Industries Bhd appear to be among those that have kept some stock. Kinsteel Bhd says it has some stock, but its utilisation has slowed somewhat to about 70% recently due to seasonal factors," said an industry analyst.

"Most steel players have an average of three months' stockpile. Those who stocked up last year can expect to make some money up until April, but what will happen in subsequent months is anyone's guess."

An observer said he expected restocking to take place soon, adding that he reckoned prices would rise even further after the Chinese New Year festivities.

"I think prices (of iron ore) may go up even higher in 2QCY2011," he said, adding that steel was still seen as a laggard especially after the most recent quantitative easing exercise undertaken by the US Federal Reserve.

He said while long-product players mostly had to purchase iron ore at spot rates, putting them at the mercy of miners as they could not afford to keep too much stock, those that were involved in flat products were in a slightly better position.

In its sector update last month, HwangDBS Vickers Research said it expected Malaysia's long steel consumption to grow 5% year-on-year in 2011 to three million to 3.2 million tonnes, excluding the impact from the RM36.6 billion mass rapid transit (MRT) project.

An analyst told The Edge Financial Daily that currently, many steel players were adopting a wait-andsee attitude in the hope that prices of raw materials will go down.

"But they will have to decide at what levels they are willing to buy, because they will have to restock eventually. Keep in mind as well that there is a time-lag from steel producers passing down higher costs to customers," the analyst said, adding that this put additional pressure on margins.

Last year, iron ore prices jumped 43% to US$202 per tonne while scrap prices surged 47% to US$424 per tonne. However, the average selling prices for billets, steel bars and rods rose between 30% and 38%, while local bar prices rose between 10% and 15% only to about RM2,000 per tonne, said HwangDBS in its sector update.

It said the difference between iron ore prices and selling prices of the long and flat products meant that steel producers have been absorbing costs, thereby their margins are crimped.

The margins are expected to be squeezed further this year as the major mining companies have adopted a quarterly review of iron ore prices against a yearly review previously.

"The quarterly pricing mechanism adopted by the international miners has resulted in more volatile iron ore prices, thus making the costing of the fi nished products more challenging," said the research house.

Despite this, it believed local bar prices would improve in 2011, driven by demand from upcoming mega projects, such as the MRT and light rail transit (LRT) projects.

"Sector valuations are attractive at 0.8 times book value relative to 1994-97 levels of 1.6 times book value," it noted, adding that the sector appeared set for re-rating.

The quarterly review of iron ore prices augurs well for mining companies and is expected to be bad for steel millers.

On the international front, Bloomberg on Tuesday reported that the world's three largest mining companies — BHP Billiton Ltd, Vale SA and Rio Tinto Group — were poised for record annual earnings of an average of 66% from 2007 at the expense of their customers.

In contrast, steel giants ArcelorMittal, Baoshan Iron & Steel Co, Posco and Nippon Steel Corp could expect an average 31% slump in profit for the same period.