Malaysia - Scrap iron and steel products expected to cost more - 12 Feb 2009

Scrap iron and steel products expected to cost more
By ELAINE ANG
PETALING JAYA: The recent rebound in iron ore spot prices, slowing de-stocking of steel inventories and the economic stimulus activities around the world have raised expectations that prices of scrap iron and steel products may start rising, industry players and analysts said.
Malaysian Iron and Steel Industry Federation (MISIF) president Chow Chong Long said scrap iron prices could firm up in tandem with iron ore prices and steel mills would have to adjust their product prices accordingly.
Steel bar price at about RM1,900 per tonne currently is very competitive internationally, says MISIF president Chow Chong Long.
“Steel bar price at about RM1,900 per tonne currently is very competitive internationally,” he told StarBiz. “I think the chances are higher for steel product prices to be on the uptrend than downtrend as raw material prices increase and demand improves as de-stocking activities wind down and economic stimulus packages in various countries start to take off.”
Chow expects the de-stocking of steel inventories to be completed latest by the second quarter on average globally.
Spot iron ore prices have been improving in the past few months with prices narrowing to a 15% discount to the benchmark contract price of US$82 to US$83 per tonne before Chinese New Year (CNY) and a 9% discount after CNY, compared to a more than 30% discount at the end of last year, according to OSK Research’s analyst Ng Sem Guan.
However, negotiations are under way between mining companies and major steel players on new iron ore contract prices to take effect April 1.
Ng said the consensus was for a 20%-40% cut in benchmark contract prices due to deteriorating steel demand worldwide.
Despite the potential cut in iron ore prices, Ng sees steel prices consolidating at current levels of US$520 (RM1,860) to US$580 (RM2,080) per tonne based on the historical correlation between steel and iron ore prices.
“Demand for steel products especially long steel may drop by some 10% this year versus 2008. We expect the same quantum for steel production and sales this year,” Ng said. “The outlook may be weak but it is not as bad as many think – steel consumption should be boosted by government pump priming.”
AmResearch analyst Mak Hoy Ken said demand for steel in the country would very much depend on how fast big-impact projects such as the double tracking project was implemented and the effectiveness of stimulus packages elsewhere around the world.
“The impact of the stimulus packages will filter down to economies globally thus boosting demand of steel with prices following suit,” he said.
On the performance of local steel players, OSK’s Ng expects them to have normalised margins from the second quarter of the year as hefty inventory losses would have been written off in the fourth quarter of 2008.
“Investors can look forward to better profitability and books as the players’ cost structure readjust to normal and this could lead to a re-rating of steel stocks,” he said.