ASEAMBANKERS Research expects zero growth in global steel demand in 2009, judging from the string of job and production cuts by top global steel mills and iron ore producers.
In a report last Friday, the research house said the job and production cuts suggested that the worst was far from over. It expected 2009 net earnings to halve year-on-year, with further downside risk if global steel demand fell below its flat growth assumption.
"On the domestic front, we anticipate much lower production levels, not expecting any major impact from the RM7 billion economic stimulus package until 2H09, given lags in implementation," said Aseambankers Research in maintaining an underweight stance on the steel sector.
"Local steel exporters, too, could see quieter times as global demand wanes further. Key markets such as the Middle East are proving to be competitive, with greater competition from regional players with excess capacity," it added.
Aseambankers Research said it was cautiously optimistic for 2010.
"Net earnings are expected to improve in 2010, assuming a recovery in average steel prices to US$750 (RM2,723) per tonne, alongside improved demand from infrastructure projects, particularly in Asia's emerging economies.
"We are closely monitoring this assumption, acknowledging that steel demand and prices in 2010 would depend very much on how quick the global economic downturn bottoms in 2009," it said.
The research house noted that the third quarter in 2008 (3Q08) was a trying quarter for the steel sector.
"The recent results reporting season showed a significant, 70% quarter-on-quarter (q-o-q) drop in the combined earnings of steel mills (-10% ex-inventory writedowns)."
"Having reaped strong profits from sky-rocketing steel prices during 1H08 (+>50% year-in-year), a reversal of fortunes emerged in July 2008 with increasing resistance towards high offer prices of steel," said Aseambankers Research.
"The plunge in steel prices (bars and billets) by 20% towards end-3Q08, without correspondingly lower inventory costs (procured at higher levels) caused profit margins to contract and a writedown in inventories (comprising both inputs and finished/semi-finished goods)."
"Nonetheless, results of steel stocks that we track (Kinsteel and Ann Joo) were largely within our forecasts," it added.
In addition, Aseambankers Research noted that the latest balance sheet (as at Sept 2008) of the steel millers highlighted high inventory levels, which grew an average of 30% q-o-q. "Having to contend with the drop in input and selling prices during 3Q08, we estimate that 3Q08 inventory writedowns by domestic steel millers amounted to about 20% of the original value of materials."
"Scrap prices, which peaked at US$750 per tonne, are now hovering at US$300/tonne levels. With slowing demand, we believe that some steel mills could still be saddled with input inventories procured at around US$500 per tonne," it said.
"Moreover, in Nov 2008, Brazilian iron ore producer Vale agreed to withdraw the proposed 12% price increase in iron ore to its Asian customers, given the weak demand.
"This development may spark another round of downward revisions in contracted iron ore prices (at an average of US$150-US$160 per tonne for domestic steel mills). Given the further deterioration in input and selling prices in 4Q08, we believe that another round of inventory writedowns is likely, and brace for a drab performance into 2009," it added.
Edge Daily
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