Posted on 14 Apr 2020
Cement and steel manufactures may see trading interest after having been given the green light to resume operations under the movement control order (MCO) period, which has now been extended for another two weeks until April 28.
However, a slow pick-up in demand and potential delays in the rolling out of some infrastructure projects, could weigh on these companies.
According to analysts, the initial one-month suspension of construction works has created some cash flow pressure to building materials players due to possible delays in payment from both the public and private sectors.
“Sustainability of these companies depend on the collection from the construction sector, which is also reeling from the MCO.
"Weighing on the minds of those in the construction and building materials sectors, plus property for that matter too, are uncertainties over how long Covid-19 will last and whether project deadlines will have to be pushed out,” said one analyst.
UOB KayHian said it has reduced earnings forecasts for cement players due to the impact of the MCO, while for steel companies, they are “to remain in the red for 2020 given the lack of demand, excess supply and the continued downtrend of average selling prices (ASPs) of steel products.”
The research firm noted that year-to-date, steel bar prices have remained flattish against 2019’s average of RM2,124 per tonne.
“As at mid-March, steel bar price was recorded at RM2,105 per tonne which represents a 3.2% month-on-month contraction.
"We are of the view that steel prices will continue to be under pressure post-MCO given that demand recovery is slated to be slower than expected as construction activities will be muted," it said in a recent report.
Another issue facing the steel segment is existing oversupply. This has yet to be resolved and will lead to further compression in steel ASPs, said analysts.
In the case of bulk cement prices, UOB KayHian noted that ASPs have eased from the peak in February.
The research firm believes that the move to raise industry-wide bulk cement ASPs (including that of smaller cement players) may now be delayed.
It noted that prior to the MCO, bulk cement ASPs still hovered at around RM240-250/tonne for leading industry players.
"Recall that back in early-February, smaller cement companies announced that price hikes of RM30-40/tonne will materialise from March onwards to match the prices set by industry leaders.
"We are of the view that the cement price recovery may be gradual post-MCO and the implementation of a RM30-40/tonne price hike may only materialise in the second half of 2020."
That price hike was seen as a catalyst for the sector because it would have led to earnings recovery for cement players in 1Q20, coming from the position of having reporting significantly narrowed losses, quarter-on-quarter, in the 4Q19.
HUME INDUSTRIES BHD
’s core net loss narrowed to RM6mil in 4Q19, from 3Q19's loss of RM23.8mil. Meanwhile, Malayan Cement Bhd’s core loss fell to RM31.6mil as compared to the RM33mil loss posted in 3Q19. This was mainly due to better bulk cement ASPs, which had improved to RM235 per tonne (from below RM200/tonne in 3Q19).
However, the outlook for the steel segment remains challenging going by the losses recorded by steel companies, which had widened in 4Q19 owing to depressed ASPs and sales volumes.
In 4Q19, ANN JOO RESOURCES BHD and CHOO BEE METAL INDUSTRIES BHD reported core net losses of RM34.5mil and RM5.2mil respectively.
The Malaysian Iron and Steel Industry Federation estimated that the non-operating instruction during the first four-week MCO period is estimated to cost the whole iron and steel industry about RM3.2bil in lost revenue.
Source:The Star Online
