Local steel companies are expected to face a squeeze in their margins and earnings in the first half of this year due to the challenging outlook in the domestic and global front.
According to market analysts, industry players would encounter weak domestic steel prices, high raw material cost as well as hikes in electricity and gas tariffs this year.
In addition, local players would be pressured by the eurozone crisis, slowdown in China's economy and less robust construction activities in the developed countries.
The average local steel price is currently trading at RM2,300 per tonne compared with the average international price of US$740 (RM2,331) per tonne.
Malaysian Iron and Steel Industry Federation president Chow Chong Long concurred that the first half of 2012 would remain weak for the local steel industry.
However, he anticipated better performance in the second half with the implementation of the Economic Transformation Programme (ETP) projects.
Although local steel prices had stabilised, he said: “Local prices are still low compared with its international counterpart.
“Global steel prices are expected to firm up gradually from the second quarter onwards when stocks are low, demand gradually improving and higher cost of raw material and energy.”
RHB Research Institute Sdn Bhd in its sector update said Malaysian steel producers would not be spared from the weak outlook in the global steel sector.
“Margins and earnings for steel producers will remain depressed despite the potential pick up in the domestic construction activities underpinned by the ETP projects which can help with the utilisation rates but not on margins,” the research unit said.
It added there was the risk of dumping by China-based steel producers eventually being felt in Malaysia if the oversupply situation turned out to be worse in China.
Hence, RHB RI has cut the earnings forecasts in financial year 2012 and 2013 for local steel companies under its coverage (Ann Joo Resources Bhd, CSC Steel Holdings Bhd, Lion Industries Bhd, Perwaja Holdings Bhd, Kinsteel Bhd and Hiap Teck Ventures Bhd) by 15% to 23%.
This is largely to reflect the lower selling prices of steel products and higher raw material costs, it added.
RHB RI also expected raw material costs to remain relatively high as “the decline in iron ore prices can be milder-than-expected as a result of the supply contraints from a hike in India's iron ore export duty from 20% to 30% as well as bad weather conditions in the first quarter 2012 hampering iron ore supply from the world's largest producers, Australia and Brazil.”
Despite being bearish on steel demand which could potentially be dampened further by weak economic outlook, OSK Investment Bank said in its report that South-East Asia's steel market might hold up better than the other parts of the world.
“We still expect some government pump-priming efforts via fixed asset investments that can prop up steel demand especially for long steel products although the quantum of the stimulus may be smaller than those deployed during the last crisis,” it added.