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Monday, December 3, 2007

Steel earnings rise, shortage concerns

The Government is likely to speed up 9MP projects as we're moving into the third year of the 9MP, says analyst.

The recent results season saw a number of steel players reporting double-digit growth in revenue thanks to higher selling prices of steel.

Ann Joo Resources Bhd posted over 70% jump in pre-tax profit to RM62.1mil for third quarter ended Sept 30 on the back of almost 31% growth in sales to RM490.6mil.

Southern Steel Bhd's third quarter pre-tax profit also rose more than 70% to RM54.8mil compared with RM31.6mil in the previous year while revenue improved by close to 40% to RM885.1mil.

An artist’s impression of the Second Penang Bridge. Analysts say there could be shortage of long steel bars and billets for construction especially when major Ninth Malaysia Plan projects are mplemented almost simultaneously.

Kinsteel Bhd's turnover surged 151% to RM582.4mil in the third quarter from RM231.4mil a year ago.

Pre-tax profit, however, dropped almost 82% to RM70.5mil from RM385.9mil due to a negative goodwill arising from the acquisition of subsidiaries in the preceding year.

Not all steel companies reported improved profitability amid rising sales given that margins had been adversely squeezed by rising cost of materials.

Choo Bee Metal Industries Bhd posted 40% increase in sales in the third quarter to RM129.6mil but pre-tax profit dropped 32.6% to RM7.6mil from RM11.3mil a year ago.

Leader Steel Holdings Bhd's pre-tax profit declined to RM823,000 against RM1.7mil although revenue rose 18.8% to RM52.9mil in the third quarter.

An analyst at a local brokerage said the rising selling prices of steel would bode well for steel manufacturers.

“Rising tide lifts all boats, regardless of operational efficiency. Coupled with rising production volume and upward price trend, next year should be an even stronger year for steel makers,” he said.

Long steel bars and billets are controlled items with ceiling prices and these are usually used in construction works.

However, there is no restriction over export of such products and manufacturers may find it more profitable to sell overseas than to sell in the domestic market.

The analyst said there could be shortage of such products for construction especially when the major Ninth Malaysia Plan (9MP) projects such as the inter-state water transfer project, double-tracking and West Coast Highway were implemented almost simultaneously.

“The government is likely to speed up the projects as we're moving into the third year of the 9MP. Drawing lessons from the 8MP, between 2002 and 2003, there was a shortage,” he said.

Cement, another building material, is also seeing rising price trend. The government last December adjusted the ceiling price of cement while the automated pricing mechanism (APM) will take effect Jan 1 onwards.

YTL Cement Bhd reported a 13% increase in revenue for first quarter ended Sept 30 to RM321.2mil from RM283.9mil a year ago. Pre-tax profit improved by 45% to RM76.4mil against RM52.7mil.

The company attributed the expansion to better demand, higher efficiency and better selling prices. Cement Industries of Malaysia Bhd and Lafarge Malayan Cement Bhd have yet to release their results.

OSK Investment Bank in a recent report said there was further upside to cement prices with the APM.

“Latest data from the Construction Industry Development Board indicated that average prices of 1 tonne of OPC (ordinary portland cement) in peninsular Malaysia are RM221.20. We believe that this may see, at least, a further 10% to15% increase next year,” the brokerage said.

An analyst noted that cement was a “domestic game” given that the building material has to be near the construction side.

Nonetheless, the rising prices trend of building materials like steel and cement definitely would not bode well for contractors, as their margins would be affected, he added.

By The Star (by Yeow Pooi Ling)

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