China continues to weigh on steel companies

Stable for now: A worker stands among rolls of aluminium foil in China. Unlike steel, aluminium prices are expected to remain firm for the time being. — AFP

PETALING JAYA: The steelmaking sector remains beleaguered by a China slowdown that continues to play out.

Various economic challenges continue to be felt by the second-biggest economy in the world, including the recent property debt crisis.

The average selling prices for the raw material for steel are seeing continuing falls and this presents a challenge to companies operating in this sector, according to Kenanga Research.

“The global demand for both long and flat steel remains subdued, weighed down by the ongoing property debt crisis in China. Not helping either is the much anticipated roll-out of construction and infrastructure projects following China’s reopening not having materialised,” it said.

“What’s worse is that the effect of the traditional peak period for construction in September and October is yet to be felt,” it added.

However, Kenanga Research noted there is a silver lining for steel prices as it can be supported by potential supply constraints and the stable cost of inputs such as iron ore, scrap metal and coking coal.

It expects Ann Joo Resources Bhd and Engtex Group Bhd to continue facing margin compression while United U-Li Corp Bhd is looking at sustained demand.

This is due to demand for its cable support systems that are widely used in transportation, manufacturing and the healthcare sectors, the research house said.

Meanwhile, the aluminium sector’s raw material prices are supported by the demand-supply picture, where weaker demand is also offset by weak supply.

“There has not been any significant pick-up in demand for aluminium despite China’s reopening and its government’s efforts to stabilise the property market.

“On the flip side, the rising environmental concerns prompting the closure of fossil fuel-powered smelters (especially coal), combined with Western sanctions against Russian aluminium, are expected to keep aluminium prices firm,” it said.

In the year-to-date period, London Metal Exchange aluminium prices have averaged US$2,280 per tonne, which is 4% lower than the second half of 2022’s average of US$2,364 per tonne.

“We remain positive on the aluminium sector, anticipating stable aluminium prices due to supply limitations which align well for our sector pick, Press Metal Aluminium Holdings Bhd.

“Similarly, OM Holdings Ltd is poised to reap the benefits of a structural cost advantage over global peers thanks to its access to cost-effective hydropower through a long-term contract until 2033,” it said.

However, it noted that the picture is not as bright for steel players as they grapple with muted demand in China, notably from its sluggish property market.

But for United U-LI, Kenanga Research noted that the company had beaten expectations recently on stronger margins for its cable support systems, as industry consolidation during the pandemic had reduced competition which boosts pricing power of the remaining players.

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