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Steel sector poised for re-rating [18-01-2011]  
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The steel sector is poised for a re-rating as it will benefit from the massive construction of the mass rapid transit (MRT) system but rising material costs remains a huge risk to the sector.

Hwang DBS issued a report on the sector yesterday saying all steel companies would benefit as a result of the MRT project, which is estimated to cost more than RM36bil, making it one of the largest construction projects undertaken in the country.

“Construction work for the MRT, which is targeted to start in July, should spark demand momentum and improve steel prices,” HwangDBS said in the report.

“All companies will benefit,” the research house said, but added that there were two risks, namely the rise in costs of raw materials like iron ore, scrap metal and coking coal as well as delay, if any, in the execution of the MRT project. The Malaysian Iron and Steel Industry Federation (MISIF) president Chow Chong Long shares the same view.

“Demand for steel will be especially good in the second half of the year when the MRT project kicks off,” he said.

In the first half of the year, steel prices would largely be driven by speculative buying, given the recent flood problems in Australia, which have hurt the production of coking coal , thus potentially resulting in a tight supply of steel.

“People will buy more than they need in the first half simply because they fear a shortage due to the conditions in Australia, this will artificially drive up steel prices,” he said. Australia supplies more than half of the world's coal exports.

Nevertheless even as demand increases, the prices of raw materials, such as iron ore and scrap metal, which are the two main materials used by local steel millers, are also increasing, tracking the rising costs of coking coal, Chow warned.

For example, the price of scrap metal was about US$400 per tonne before Christmas last year, and it was now about US$570 per tonne, up 43%, said Chow.

Whether the price of steel will continue to go up will depend on whether the costs can be passed on to customers. As it is, the price of steel was still behind the increase in raw materials, up 25% in the same period to about US$2,500 per tonne now, he added.

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