This week saw Lion Industries Corp Bhd being heavily traded and its share price tumbling by over 31% since Wednesday. The stock finished at 49 sen yesterday against Tuesday’s close of 72 sen.
Of the other steel counters that have fallen since Wednesday, Kinsteel Bhd shed 10% to 39.5 sen; Perwaja Holdings Bhd plunged 14.5% to 74 sen; while Ann Joo Resources Bhd, which saw trading volume start to spike on Tuesday, fell 27% over the four trading days to close at RM1.19.
However, contrary to previous periods of turmoil in 2005 that saw alleged dumping by China-based steel makers with excess capacity, the current situation is more nuanced than one might imagine.
OSK Investment Bank analyst Ng Sem Guan told StarBiz the global steel industry was more disciplined this time and he did not expect to see much dumping.
Ng said the global steel sector, including China’s, had been experiencing strong earnings in the past two years and had the reserves to support a scaling back of production to maintain steel prices.
“China also has high costs and globally we are seeing the industry making production cuts to overcome market factors,” he said.
However, he conceded that the sudden onset of the US financial crisis would have some impact on the sector.
“A cycle change in less than two months is definitely a shock to the industry but the government is liable to monitor the import situation,” he said.
A Lion Industries spokesman attributed the fall in global steel prices partly to unexpected weather conditions.
“We view the drop in demand beginning in the third quarter as seasonal due to weather conditions hampering construction activities in Asia and the Middle East.
“The drop continued into the fourth quarter, mirroring growing uncertainties of underlying demand with the threat of a global recession and tighter credit facilities to steel traders and producers,” he told StarBiz.
The spokesman confirmed the company had curbed production. “We are closely monitoring the market situation and will adjust our production accordingly.”
On the industry outlook, he said the company expected the market to pick up in 2009, “given the cyclical nature of the steel business.”
As for the immediate term, he said costs for raw materials such as scrap metal had also dropped concurrent with the fall in global steel prices and he expected margins to be impacted.
Perwaja Holdings Bhd managing director Tan Sri Pheng Yin Huah disclosed that his company had also cut production.
“Yes, worldwide steel millers are cutting production and we are of the opinion that this is a sensible and wise move.
“It is wrong to perceive that the steel industry is troubled when steel millers cut production. The steel millers are adjusting their production according to market forces.
“Overstocking does not benefit the millers. Perwaja is monitoring the situation closely and its production level will depend on the market situation,” he said.
As for the industry outlook, Pheng said while there was still demand for steel products locally, it was “not as robust as before the credit crunch”.
He said the steel demand was closely linked to the Malaysian economy, which had not adversely affected by the financial turmoil and was still recording growth.
On the plus side, the cheaper steel stocks offer a good buy with OSK’s Ng saying that it would be “unreasonable to downgrade at these (current) valuations, with such low price to net asset value figures.”
Meanwhile, Master Builders Association Malaysia secretary-general Yap Yoke Keong said domestic steel prices were still about 15% higher than in neighbouring countries.
According to Yap, only the very large contractors in the country imported steel materials directly while the smaller players sourced from stockists.
Going forward, Yap sees some slowdown in construction activities in the medium term as both the private sector and the Government adopted a wait and see attitude in executing their projects.
By The Star (by Loong Tse Min)
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