Stock Name: KINSTEL
Company Name: KINSTEEL BHD
Research House: OSK
Steel sector
Reiterate overweight: Bloomberg reported that Vale SA, the world's largest iron ore producer, and BHP Billiton Ltd have ended a 40-year system of setting annual prices by signing short-term contracts with Asian steel mills, with the Brazilian company clinching a 90% increase. Sumitomo Metal Industries Co, Japan's third-biggest steelmaker, agreed to pay Vale US$100 (RM327) to US$110 a tonne for the three months beginning April 1.
This is just after the coking coal suppliers recently sealed a quarterly deal with steel mills at a 55% rise for the burning material.
Obviously, the 90% and 55% price increases for iron ore and coking coal are way above our assumption of 25%, but we prefer to monitor the situation before fine-tuning our original assumption, as the settlement will be in force only for one quarter.
That said, our quick back-of-envelope calculation reveals that the higher cost of iron ore and coking coal may translate into an approximate US$85 and US$45 rise in every tonne of steel scrap cost, assuming perfect substitution.
Average selling prices (ASP) for steel products have been escalating since December 2009. The last we heard, steel billets and bars were traded at above US$600 and US$640 respectively in the East Asia market. Assuming that scrap cost weakens back to the US$430 level, finished and semi-finished steel prices may have a 5% upside potential. Otherwise, we expect at least another 8% to 10% upside to compensate for the current high scrap cost of electric arc furnace producers.
On the local front, we were last told that steel bars are transacting at about RM2,150 per tonne, almost similar to the present export pricing. We think that local steel prices may continue to enjoy some premium on logistics and distribution advantages, although the quantum of increase may range from RM100 to RM250 per tonne.
We continue to think that with ongoing projects helping to sustain 70% of regular annual long steel consumption, the balance may be compensated if most public projects are executed in a timely manner.
Local steel mills export on average more than one million tonnes of long steel products annually, particularly in the last two years. Malaysia's exports escalated after China imposed a 25% export tax on billets, creating a vacuum of five million tonnes of billets in the Southeast Asia market, as China previously supplied 75% of the region's requirements.
An improvement in the economies of the Middle East, Australia, Pakistan, and Bangladesh will also be a boon to Malaysia's billet exports. Nevertheless, the much sharper increase in the benchmark price needs close monitoring as too high a price may cause a sharp correction in steel prices if the market is unable to support such price levels.
As the higher coking coal and iron ore benchmark prices support our bullish short-to-medium-term view in terms of margin expansion, we reiterate our overweight rating on the steel sector. We have shown in our last report that there is a strong correlation of more than 0.85 times between steel price and share price performance. This gives us optimism of possible rotational play on steel counters given the possible surge in ASP in the near future.
We have buy recommendations on Lion Industries (target price RM2.51), Southern Steel (RM3.04) and Masteel (RM1.45), a trading buy on Perwaja (RM1.84) and Kinsteel (RM1.17), but a neutral on Ann Joo Resources Bhd (RM2.75). - OSK Research, March 31
This article appeared in The Edge Financial Daily, April 1, 2010.
Company Name: KINSTEEL BHD
Research House: OSK
Steel sector
Reiterate overweight: Bloomberg reported that Vale SA, the world's largest iron ore producer, and BHP Billiton Ltd have ended a 40-year system of setting annual prices by signing short-term contracts with Asian steel mills, with the Brazilian company clinching a 90% increase. Sumitomo Metal Industries Co, Japan's third-biggest steelmaker, agreed to pay Vale US$100 (RM327) to US$110 a tonne for the three months beginning April 1.
This is just after the coking coal suppliers recently sealed a quarterly deal with steel mills at a 55% rise for the burning material.
Obviously, the 90% and 55% price increases for iron ore and coking coal are way above our assumption of 25%, but we prefer to monitor the situation before fine-tuning our original assumption, as the settlement will be in force only for one quarter.
That said, our quick back-of-envelope calculation reveals that the higher cost of iron ore and coking coal may translate into an approximate US$85 and US$45 rise in every tonne of steel scrap cost, assuming perfect substitution.
Average selling prices (ASP) for steel products have been escalating since December 2009. The last we heard, steel billets and bars were traded at above US$600 and US$640 respectively in the East Asia market. Assuming that scrap cost weakens back to the US$430 level, finished and semi-finished steel prices may have a 5% upside potential. Otherwise, we expect at least another 8% to 10% upside to compensate for the current high scrap cost of electric arc furnace producers.
On the local front, we were last told that steel bars are transacting at about RM2,150 per tonne, almost similar to the present export pricing. We think that local steel prices may continue to enjoy some premium on logistics and distribution advantages, although the quantum of increase may range from RM100 to RM250 per tonne.
We continue to think that with ongoing projects helping to sustain 70% of regular annual long steel consumption, the balance may be compensated if most public projects are executed in a timely manner.
Local steel mills export on average more than one million tonnes of long steel products annually, particularly in the last two years. Malaysia's exports escalated after China imposed a 25% export tax on billets, creating a vacuum of five million tonnes of billets in the Southeast Asia market, as China previously supplied 75% of the region's requirements.
An improvement in the economies of the Middle East, Australia, Pakistan, and Bangladesh will also be a boon to Malaysia's billet exports. Nevertheless, the much sharper increase in the benchmark price needs close monitoring as too high a price may cause a sharp correction in steel prices if the market is unable to support such price levels.
As the higher coking coal and iron ore benchmark prices support our bullish short-to-medium-term view in terms of margin expansion, we reiterate our overweight rating on the steel sector. We have shown in our last report that there is a strong correlation of more than 0.85 times between steel price and share price performance. This gives us optimism of possible rotational play on steel counters given the possible surge in ASP in the near future.
We have buy recommendations on Lion Industries (target price RM2.51), Southern Steel (RM3.04) and Masteel (RM1.45), a trading buy on Perwaja (RM1.84) and Kinsteel (RM1.17), but a neutral on Ann Joo Resources Bhd (RM2.75). - OSK Research, March 31
This article appeared in The Edge Financial Daily, April 1, 2010.
No comments:
Post a Comment