Steel and cement-based companies could register softer earnings in the first quarter of 2019 in view of weak cement and steel demand, coupled with cost-induced pressure.
UOB Kay Hian in a report yesterday said the gross profits for steel companies are expected to contract further during the quarter to RM522 per tonne from RM793 per tonne.
“To note, billets and bars prices declined by 9.8% quarter-on-quarter (to RM1,976 per tonne) and 8.5% quarter-on-quarter (to RM2,151 per tonne) respectively in the first quarter.”
In view of persistently weak construction activities, the research house said industry players are expecting cement demand to fall by 2.6% year-on-year in 2019 to 17.1 million tonnes.
“This would mean more excess capacity within the industry of which’s capacity is already at 13.5 million tonnes in 2018 and is expected to widen to 13.9 million tonnes in 2019.
“That said, industry utilisation rates are expected to drop from 57% in 2018 to 55% in 2019. We also gathered that the cement demand will only experience a mild recovery of a 1% improvement in demand in 2020 and subsequent recovery of 1.5% in 2021.”
Separately, UOB Kay Hian said steel prices were up month-on-month in March.
“According to the International Trade and Industry Ministry, local billets prices rose 2.9% month-on-month to RM2,050 per tonne and steel bar prices increased 2.5% month-on-month to RM2,195 per tonne in March.”
The rise in local steel prices were in tandem with movements in China steel prices last month, said the research house.
“We believe that the higher local and China steel prices were predominantly due to high raw material prices, particularly iron ore and international scrap prices.
“As at April 4, 2019, iron ore prices jumped 8.5% month-on-month to US$93 (RM383) per tonne from US$86 (RM354) per tonne in March due to the Vale Dam disaster in Brazil which resulted in a shortage of iron ore although its contribution to global supply of iron ore was not significantly material.”
Separately, UOB Kay Hian said cement average selling price had improved on higher fuel prices.
“Based on our channel checks, bulk cement prices improved slightly in the first quarter of 2019 albeit still hovering below the RM200 per tonne level, which represents approximately 45% discount to its ceiling price.
“We understand that the improvement in cement average selling price was largely to compensate for the electricity tariff hike in January,” said the research house.