Kenanga Research (Kenanga) expects prices of aluminium, FeSi and SiMn to stabilise at the current levels. While China has taken steps to stabilise its property market, the demand for aluminium has yet to pick up significantly.
“We also gathered that aluminium smelters in China have not increased their production despite China’s reopening and the easing in fuel cost,” said Kenanga in the recent Sector Update Report.
Meanwhile, supply constraints will persist with the decommissioning of fossil fuel-powered smelters, especially coal, due to strict environmental requirements coupled with Western sanctions against Russian aluminium, providing support to aluminium prices.
Year-to-date, LME aluminium prices averaged at USD2,347 per megatonne, which is slightly 1% lower than USD2,364 per megatonne in second half of calendar year 2022.
Meanwhile, year-to-date, FeSi and SiMn prices averaged at USD1,045 per megatonne and USD1,577 per megatonne, which are 2% and 6% lower than USD1,063 per megatonne and USD1,682 per megatonne registered in second half of calendar year 2022, respectively.
Hence, aluminium smelter PMETAL and FeSi and SiMn producer OMH should be able to deliver decent profits. Lack of catalyst to drive steel prices higher. On the other hand, steel prices are likely to remain in the doldrums in the absence of significant stimulus and a soft property market in China.
“We gathered that the roll-out of large-scale infrastructure projects and a more meaningful pickup in the property sector in China are more likely to materialise towards the later part of 2023,” said Kenanga.
In May, the local long steel price declined to RM2,911 per tonne while local flat steel price declined to RM3,670 per tonne amidst the slow demand recovery and excess production in China.
As such, local steel players including Ann Joo Resources (ANNJOO), and United U-Li Corporation (ULICORP) will still not be able to significantly raise selling prices to boost margins.
Meanwhile, Engtex Group (ENGTEX) is well-positioned to benefit from the revival of water projects as the unity government initiates public infrastructure roll-outs.
While the company holds dominant market positions in manufacturing pipes for water projects, it is important to note that a significant portion of its revenue still comes from low-margin generic steel products.
Kenanga maintains Overweight on the sector. Their sector top picks are:
1/ Press Metal Aluminium Holdings (PMETAL) given its structural cost advantage over international peers given its access to low-cost hydro-power, secured under four long-term PPA contracts ending between 2023 and 2040. Also it has strongly secured alumina supply with stakes in two alumina miners, Japan Alumina Associate (40%) and PT Bintan (25%) which supply 80% of its requirements, and
its green investment appeal as a clean energy source producer.
2/ OM Holdings Ltd (OMH) given its structural cost advantage over international peers given its access to low-cost hydro-power under a 20-year contract ending 2033, and its strong growth prospects underpinned by plans to expand its capacity by 30%-36% to
610,000-640,000 metric tonnes per annum over the medium term, and its appeal to investors given its clean energy source.
