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Home / [The Star] Lower margin risk amid another profitable year for steelmakers

By Ganeshwaran Kana

AFTER a strong 2021, thanks to higher selling prices, many steel producers could be looking at compressed margins and a normalisation in selling prices this year.

Amid the expected recovery in demand, steel players are already facing a rise in raw material prices such as iron ore, coupled with higher energy and freight costs.

Nevertheless, an analyst says steel producers could still expect to be profitable in 2022, leveraging on the pick up in construction and industrial activities following the reopening of the economy.

“Global supply chain disruption, stemming from China’s zero-Covid policy and the Russia-Ukraine war, could also keep steel selling prices elevated,” the analyst adds.

The lower margin and selling prices are expected to affect even the country’s largest listed steel maker, Ann Joo Resources Bhd.

In a sector report published on April 4, Kenanga Research said that Ann Joo’s peak profitability has passed, and earnings could turn weaker in the subsequent quarters.

This is premised on the expectation that weakening steel price would compress margins as raw material costs play catch-up.

Iron ore, which is the primary raw material in blast furnace steel production, has seen a rise in price of almost 40% year-to-date.

Price of metallurgical coal, which constitutes about 40% of the blast furnace cost of production, has also remained at a high level in 2022.

Amid the challenges, an analyst says that Asian steelmakers, including Malaysia, would benefit from China’s move to curb its domestic steel production as the country seeks to be more environment-friendly.

“China will have to import steel from elsewhere to meet local needs for steel, so producers in other countries such as Malaysia would benefit from this.

“Other countries that could no longer purchase the same volume of steel from China would also turn to Malaysia, for example.

“This is positive for the top line of local steel makers this year,” the analyst says.

The expectations of another positive year for steel players, despite the impact on margin and selling prices, have boosted local steel stocks in the past one month.

Ann Joo and Hiap Teck Venture Bhd are up by over 10% and 7% respectively, while Lion Industries Corp Bhd’s share price has increased by almost 13%.

A smallish steel player, Malaysia Steel Works (KL) Bhd (Masteel), is also up by 11.3% in the period.

Despite the increase, it is worth noting that these stocks remain well below the highs seen in 2021.

It seems that the market still awaits the steel players to deliver positive earnings in the recently concluded first quarter of 2022.

Masteel, which is involved in the manufacturing of high tensile steel bars, mild steel bars and prime steel billets, remains positive of the industry’s outlook.

In its results filing released on Feb 22, Masteel said the commencement of spring civil construction period in North Asia and the ending of restrictions of steel mill activities in China for the Beijing winter Olympics are causing steel prices to recover internationally and domestically.

The group, whose more than 91% of its revenue is contributed domestically, expects prices of local steel bars are expected to continue to trend higher.

This is due to rising international steel prices and the gradual recovery of the Malaysian economy from the Covid-19 pandemic.

The group also exports its steel products to China, Australia, New Zealand, Indonesia, Singapore and Vietnam, among others.

“The company continues to maximise its new steel making facilities and is expected to perform satisfactorily amid some short term volatilities due to the Omicron wave and shortage of labour issues in the country,” Masteel said.

Masteel staged a turnaround in the financial year ended Dec 31, 2021 (FY21), after two consecutive years of losses.

The rebound was possible on the back of higher selling prices, resulting from the recovery of the international and local steel prices, and enhanced production cost efficiency.

The steelmaker recorded a net profit of RM32.5mil in FY21 as compared to a net loss of RM14.73mil in the previous corresponding year.

Masteel’s revenue, on the other hand, improved by 14.18% year-on-year to RM1.58bil from RM1.38bil in the previous year.

This was achieved despite recording lower sales volume in FY21.

The group’s net profit margin in FY21 was recorded at 2.1%

While Masteel declined to respond to StarBizWeek’s queries, including on the plans to enlarge its capacity, the group has previously said that it has substantial capacity to meet the anticipated uplift in industry demand.

Masteel plans to capitalise on its upgraded steel manufacturing facilities to meet the increased demand.

In an earlier press statement, Masteel managing director and CEO Datuk Seri Tai Hean Leng remained upbeat on the group’s prospects.

This is considering that the stronger demand for steel from the accelerated pace of economic activities globally were expected to overshadow the impact of uptrending raw material prices.

Moreover, the ongoing conflict in Eastern Europe is not expected to have any impact on the group’s earnings, according to Tai.

“With our large capacity and reliable delivery network, we are confident of capturing this demand wave,” he said.

Masteel’s ability to further expand its production capacity may be restricted, considering that the group already has high debts on its books.

As of end-2021, the steelmaker had total borrowings of RM380.82mil against cash and cash equivalents of RM56.96mil.

In terms of valuations, Masteel has a price-to-earnings (PE) ratio of 7.1 times, compared to AnnJoo’s 4.32 times and Hiap Teck’s 3.44 times.

Choo Bee Metal Industries has a PE ratio of 2.46 times and Leon Fuat Bhd is valued at a PE ratio of 2.03 times.

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