China factor key to building material sector

Kenanga Research expects stable price outlook for non-ferrous metals.

PETALING JAYA: Kenanga Research has downgrade the local building materials sector to a “neutral” from an “overweight” call in the absence of strong policy responses from China to revive its economy.

The brokerage firm said the China factor could see the outlook for ferrous and non-ferrous metals unlikely to improve, despite partially cushioned by supply constraints due to the ongoing phasing out of polluting production capacity and easing input costs.

However, Kenanga Research expects stable price outlook for non-ferrous metals.

“While prices have been weak in the past three months, we expect prices of aluminium, ferrosilicon (FeSi) and silicon manganese (SiMn) to stabilise at the current levels,” the brokerage firm said in a note to clients yesterday.

It attributed the weak prices to the economic challenges in China and the slowdown in advanced economies.

On a brighter note, supply constraints will persist with the decommissioning of fossil fuel-powered smelters (especially coal) due to strict environmental requirements coupled with Western sanctions against Russian aluminium, providing support to average selling price (ASP), it added.

Year-to-date, the London Metal Exchange aluminium prices averaged at US$2,275 per tonne, which is 4% lower than US$2,364 per tonne in the second half of 2022 (2H22).

Both the FeSi and SiMn prices averaged at US$1,489 and US$992 per tonne year-to-date, which are 12% and 7% lower than US$1,682 and US$1,063 per tonne registered in 2H22 respectively.

In view of the softening ASP, Kenanga Research expects aluminium smelter Press Metal Aluminium Holdings Bhd and FeSi and SiMn producer, OMH Holdings Ltd to post weaker 2H23 results.

Meanwhile, the steel sector outlook remained bleak primarily due to the lingering property debt crisis and the lack of substantial stimulus in China.

However, this is mitigated by supply constraints and the easing cost of inputs such as iron ore, scrap metal and coking coal, said Kenanga Research.

In September, the local long steel price declined to about RM2,581 a tonne, while local flat steel price declined to RM3,489 a tonne amid the slow demand recovery and excess production in China.

“As such, local steel players including Ann Joo Resources Bhd and Engtex Group Bhd will still be not able to significantly raise selling prices to boost margins,” added the brokerage firm.

But, it saw a bright spot in United ULI Corp Bhd given a strong pick-up in orders for its key product namely cable support systems.

Kenanga Research: “The group is bracing for even busier times ahead driven by potential orders from Mass Rapid Transit (MRT) 3, Rapid Transit System, Singapore MRT expansion and new data centres.”

Its sector top pick is OMH given its structural cost advantage over international peers given its access to low-cost hydropower under a 20-year contract ending 2033.

In addition, OMH has strong growth prospects underpinned by plans to expand its capacity by 30%-36% to 610,000 tonnes to 640,000 tonnes per annum over the medium term and appeal to investors given its clean energy source.

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