KUALA LUMPUR: Building material companies, especially steel players, seem to be enjoying a good start to the year, setting to see an increase in construction activities, mainly in the infrastructure space.
A handful of steel firms have in fact already been seeing a surge in share prices since a couple of months ago.
Leading the way is Melewar Industrial Group Bhd, which manufactures cold-rolled coil steel sheets and steel tubes and pipes through its unit, Mycron Steel Bhd. The stock rose 74% in the first seven trading days of 2020, bringing its three-month gain to 118.52%.
Elsewhere, YKGI Holdings Bhd (flat product player), Malaysia Steel Works (KL) Bhd (long product maker) and Hiap Teck Venture Bhd (steel pipemaker) have all risen by over 15% over the past three months.
TA Investment Management Bhd chief investment officer Choo Swee Kee said the worst is likely over for the steel sector in the short term. This is despite expectations that the actual implementation of mega infrastructure projects in the country will start only in the fourth quarter of 2020 at the earliest.
Choo said the current rebound in the share prices of some steel players is “just a knee-jerk reaction”, triggered by news that the government is imposing anti-dumping tariffs and the revival of two mega projects — Bandar Malaysia and the Kuala Lumpur-Singapore high-speed rail.
“For share prices to sustain their uptrend, steel companies must actually benefit from these announcements,” he told The Edge Financial Daily.
Another analyst following the uptick in trading sentiment among building materials-related counters, said when contacted that there still appears to be follow-through buying as the market participants are buying ahead of anticipated vibrant newsflow in the first half of this year.
He said given the potential positive newsflow in the construction space, it is likely that the trading tone could gradually increase for building materials companies, such as cement and steel players, as well as piling and earthworks firms.
However, the analyst cautioned that most mega projects that were given the green light to proceed have had their costs revised downwards, which may lead to a margin squeeze.
For instance, the cost of the East Coast Rail Link was halved to RM44 billion from the original sum of RM81 billion. Similarly, the Light Rail Transit Line 3 was only allowed to proceed by the government at RM16.6 billion, versus RM31.7 billion originally.
“Selling prices may be stagnant and raw materials, albeit already trended lower last year, as well as the timing of the future infrastructure projects if delayed, will impact the building materials segment.
“Most of the infrastructure projects have also been reviewed down in terms of costs, translating into a potential squeezing of [margins] for the steel products suppliers,” the analyst explained.
Domestic steel prices have staged a slight recovery from their lows in the third to early fourth quarter of last year. Data compiled by the ministry of international trade and industry showed that domestic billet prices have recovered to the RM1,800-RM1,900 a tonne level, from its low of RM1,650, while steel bars have risen to RM1,950 as of Jan 3, compared with its 2019 low of RM1,780 in September.
Despite so, it is worth noting that prices have yet to recover past their 2019 highs of above RM2,000 a tonne as observed from February to May.
Regardless, another analyst believes that if anything, the construction firms will be the first beneficiary, rather than building material manufacturers.
The reason for this is because early stages of construction works will not need much building materials.
“The projects would start off with earthworks first. It would usually be in the second or third year, before we see a pickup in demand for building materials,” said this analyst.
He highlighted that it would take more than just infrastructure projects to spur the demand for building materials, especially steel products, saying that the bigger impact would be from the pricing standpoint.
The oversupply of steel products continues to be a major challenge, pointed out Choo.
He said the supply situation could get worse if the government allows more Chinese players to operate and sell their products in Malaysia without proper safeguards.
“The ongoing [Sino-US] trade war could have an indirect impact, in that mainland-based Chinese companies could set up manufacturing bases in Southeast Asian countries such as Malaysia,” he added.