Would You Have A Punt On The Steel Stocks?

On The Edge Financial Daily: MISIF: Steel players hope to break even

• KUALA LUMPUR: The local steel industry continues to see a challenging year ahead as waning domestic and external demand is compounded by overcapacity due to over expansion.
  
  “Given such a scenario, prices of steel are not likely to recover soon. Most Malaysian steel players are mainly talking about breaking even, with only the smaller players with lesser capacity able to be profitable,” said Chow Chong Long, president of Malaysian Iron and Steel Industry Federation (MISIF).
  
  The apparent increase in overseas demand lately offered a much-needed reprieve for local steel millers, said Chow, as the domestic industry had been hit by overcapacity that led to stockholding and a sharp drop in capacity utilisation.
  
  “Most of our steel millers are operating at around 50% or less of their full capacity, and exports on average account for around 20% of their total production,” Chow told The Edge Financial Daily on the sidelines of the Southeast Asia Iron & Steel Institute Conference here yesterday.
  
  Last year, Malaysia exported around RM10.5 billion worth of iron and steel products, with Singapore, Indonesia and Thailand accounting for RM4.6 billion of the total. Total trade in iron and steel products amounted to RM35.3 billion, or around 4.4% of the country’s total trade.
  
  “The increase in orders mainly came from this region, with China and Vietnam leading the way. But no one is sure how long this would last, while domestic demand is still weak,” said Chow.
  
  He added that recovery would be modest and gradual by the end of the year. The federation expects demand to contract by another 25% this year from 2008, largely due to the more than 50% dive in the first quarter. Total demand for steel products saw a 10.7% drop last year from 2007.
  
  Chow said the last two months had seen some effect from the economic stimulus measures announced by the government, helping to spur domestic demand for long steel products (used mainly in construction work) as spending on public infrastructure, including schools, increased.
  
  A total of RM15.6 billion from the RM67 billion stimulus packages has been allocated for construction and related industries. However, the demand for flat steel products (mainly used in consumer goods such as cars) is expected to remain weak, due to the lack of catalysts to spur such demand in the near term.
  
  Chow said the key message to Malaysian steel millers was to be realistic, and to acknowledge that the peak in demand and production enjoyed in early 2008 would not return in the near future.
  
  “They have to produce according to demand. While the large inventories besetting the industry have largely been addressed in the first quarter, the problem of overstocking that depressed prices could return if all the steel millers start to ramp up production again,” Chow said.
  
  Steel bars now cost around RM2,000 per tonne, after dropping to as low as RM1,600 in the first quarter, but still a far cry from its peak of around RM3,800 during its peak in July last year, Chow added.

Meanwhile, local steel players like Perwaja Holdings and Kinsteel reported huge losses.

Ah. Not to worry my dearest Brown Cow.

The bad news as usual is discounted, so says the market sifu.

Perwaja is up some 8% and Kinsteel is up some 6%.

Last night, Perwaja announced that it lost some 56 million, while Kinsteel lost some 34.7 million.

So how discounted is the bad news huh?

Let's see. As per the industry president, Mr. Chow. Steel prices used to sell around rm3800 at its peak. It fell to as low as rm1600 but has recovered to around rm2000.

So clearly, things aren't as bad, since the prices has stopped falling and has recovered to rm2000 from rm1600.00.

So would you buy the stock since the prices have recovered (discounting the fact that as per the industry president, Mr.Chow, saying that our steel millers are only operating at 50% capicity and that most steel players are talking about breaking even only)?

How about taking a look at how the stocks has performed since March 2009?

This is Perwaja.

Perwaja was trading as low as 59 sen back on 16th March 2009. It last traded at 1.20.

Here is the link to its earnings report last night: Quarterly rpt on consolidated results for the financial period ended 31/3/2009

And here is how Kinsteel is doing.

Kinsteel was trading as low as 0.36 back on 20th March 2009. It last traded at 85 sen.

Here is the link to its earnings report last night. Quarterly rpt on consolidated results for the financial period ended 31/3/2009

How?

One can indeed point out that the market discounts the bad news. And the fact that China and Vietnam has been ordering steel bars, the future is indeed very bright for the steel players.

But as mentioned by the industry president, how long would these orders last?

And look at the stock prices. Discounting the bad news is understandable but isn't it possible that based on the recent price movements, stocks like Perwaja and Kinsteel have simply grossly over discounted the bad news? Not possible?

And some punters would simply say I write too much. LOL! Yes, as mentioned, the short term market movements have nothing to do with market fundamentals. Screw the fundamentals dude! This is a traders market! Fundamental talk is obsolete! LOL!

So what's the conclusion?

LOL!

Don't ask me. Haven't I said earlier that I Who Know Nothing?

*whistle*

Oops. A thousand apologies. Missed this other article. RHB overweight on steel sub-sector

• RHB Research upgraded its recommendation on the steel sub-sector to overweight from neutral on the back of better earnings visibility.
  
  To clarify, the steel sub-sector includes not only the steel players but also companies that deal with metallurgical coke. Metallurgical coke is used as an energy source for the smelting of iron ore in the manufacturing of steel.
  
  “The recent strong run-up in share prices has yet to fully reflect the fundamentals of steel stocks that will improve substantially in the near term as the RMB4 trillion (RM2.1 trillion) stimulus plan by the Chinese government has started to kick in,” said RHB.
  
  The research house also pointed out that concerns on dumping from Chinese long steel producers have eased, while rising crude oil prices will help to boost demand for long steel products in the Middle East.
  
  “However, we are maintaining our view that the recovery in both the demand and prices of flat steel products will lag the long steel products. We only expect a mild recovery in this segment due to the Chinese government recently raising export rebates for flat steel products and hefty duties slapped on the US Commerce Department on standard steel pipes imported to the US from China since June 2008 have prompted Chinese steel pipe producers to divert their products to the international market ex-US,” said RHB.
  
  RHB is also cautious on the metallurgical coke sector stating, “Despite the higher capacity utilisation in China’s steel sector will boost demand and process of metallurgical coke, this does not necessarily enhance metallurgical coke producers’ profitability, given that these producers inherently have little bargaining power against its customers and suppliers.”
  
  RHB rationalised its valuation base year for the sector from the average of CY2009 to CY2010 to CY2010 for valuation purposes.
  
  “Also, to reflect increased investors’ appetite as well as improved earnings visibility, we are raising our one-year forward target price earnings ratio (PER) for the steel sub-sector players by 1 to 3 times from 6 to 7 times to 7 to 10 times,” said RHB.
  
  The research house’s top picks for the steel sub-sector include Ann Joo Resources Bhd, Kinsteel Bhd and Sino Hua-An International Bhd.
  
  “We believe Ann Joo and Kinsteel would be the major beneficiaries from the upswing in demand and prices for long steel products, as it is one of the biggest long steel producers in Malaysia.”
  
  “While we anticipate Sino Hua-An to report a dismal first quarter in financial year 2009 (1QFY2009), we view the company as the best proxy to invest in the booming steel sector in China, given that the demand for metallurgical coke is tied directly to China’s steel output,” said RHB.
  
  RHB has an indicative fair value of RM3.02 for Ann Joo, RM1.25 for Kinsteel and 60 sen for Sino Hua-An.
  
  Among the risks RHB foresees for the steel sub-sector are changes in export policies in the world’s major steel-producing countries that will result in dumping activities and a steeper-than-expected contraction in global steel consumption, among others.
  
  “Risks for metallurgical coke sub-sector include increases in China’s export tariff for steel that will hurt demand for metallurgical coke and higher-than-expected metallurgical coal prices that will erode metallurgical coke producers and lower contribution from high-margin by-products,” said RHB.
  
  
  This article appeared in The Edge Financial Daily, May 19, 2009.