Industrial output, investment and retail sales all grew less than expected, data showed on Thursday, offsetting upbeat trade data and suggesting further weakness ahead if Beijing perseveres with its crackdown on factory pollution and questionable local government spending.
PETALING JAYA: The demand for the steel sector is expected to remain subdued in the second half of the year although there was a slight recovery early this month.
UOB Kay Hian on Thursday said it believe any improvement in steel demand would be gradual as construction of mega projects are still at the infancy stage and some are clouded by uncertainties of whether they are able to proceed.
The research house, which is maintaining its market weight on the sector, said: “We think the upside from the consolidation of the steel industry in China is limited with the planned capacity cuts coming to a tail-end coupled with the replacement of defunct mills taking place between 2018 and 2023.
“Nevertheless, stocks have been overly sold, and the market is under estimating the companies’ ability to sustain relatively healthy cash flows and high dividend yields.
“We are forecasting sector earnings to dip by 2.5% and 2.9% y-o-y in 2018-19 respectively (due to soft steel demand) and improve by 3.3% y-o-y in 2020, it noted.
Local steel bar prices were at RM2,475 per tonne as at September 14 and have been stagnant since July. Despite the rally in China’s steel
prices since end-August (+9.0% m-o-m), it believe local steel prices would only trend upwards when the construction of mega projects starts to pick up.
Second quarter 2018 (Q2 18) net profit fell by an average of 47.9% q-o-q and 60.1% q-o-q for long steel companies and flat steel companies respectively.
It was a triple whammy for the sector, hit by fewer working days (due to Ramadhan and Hari Raya festivals) in the quarter, lower average selling prices (ASPs) (2Q18: RM2,442 per tonne, Q1 18: RM2,638 per tonne) as well as slower-than-expected steel demand arising from delayed mega and infrastructure projects.
In Q3 18, earnings would mildly improve q-o-q largely on a low base. Further earnings improvement may be in Q4 18 as companies start to ramp up exports to utilise their export tax incentives for 2018, the brokerage added.
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