Steel: Any More Upside?

Last week, our Government announced provisional safeguard measures for imported steel coils and reinforced bars at a duty rate of 13.9% and 13.4% respectively. This move will likely to benefit producers of long steel products, such as Annjoo, SSteel & Masteel as it will boost the ASPs of their steel coils and reinforced bars.

In addition, the threat of lower steel prices coming from China is likely to subside due to (i) China’s depleting steel inventory indicating rising domestic demand there, (ii) closure of loss-making steel mills in China, and (iii) China governments’ strong commitment in reducing steel production capacity through consolidation of steel groups coupled with financial support of RMB100b for worker retrenchment schemes. This is based on the daily report from Kenanga Research.

The timeline of the positive developments for the long steel products sector this year is as follows:

•  From March to middle April, steel prices recovered in China
•  Late April to May, steel prices corrected in China
•  From June onward, steel prices have been rising in China   
•  Last week, our Government imposed additional duty on steel coils and reinforced bars on top of the existing 5% duty

The slew of good news has propelled the steel stocks to swing up. With strong momentum, these stocks were able to break above their respective long-term downtrend line. This is a significant point and it bears repeating: Steel stocks are now above their LONG-TERM DOWNTREND LINES. However, the sharp price run-up is ahead of earnings and correction may kick in any time. Those who have not gotten in, my recommendation is to sit tight. If the stocks correct and the price pulled back to the long-term downtrend breakout price, that would be a good level to slowly gain your entry.

 
Chart 1: Annjoo's monthly chart as at Sep 26, 2014_12.30 (Source: Shareinvestor.com)


Chart 2: Masteel's monthly chart as at Sep 26, 2014_12.30 (Source: Shareinvestor.com)


Chart 3: SSteel's monthly chart as at Sep 26, 2014_12.30 (Source: Shareinvestor.com)

Meanwhile, the flat steel products players are also doing quite well. They are having a pretty good run after Megasteel closed down. Megasteel used to produced HRC- the raw material for making flat steel products- at higher prices than imported HRC. Thus, the closure of Megasteel will enable flat steel producers, such as Mycron, to source for cheaper HRC and improve their bottom-line.


Chart 4: Mycron's monthly chart as at Sep 26, 2014_12.30 (Source: Shareinvestor.com)


Chart 5: Melewar's monthly chart as at Sep 26, 2014_12.30 (Source: Shareinvestor.com)

Like long products players, flat products players have had a very strong rally. You may want to wait for price pullback before gaining your entry. For bigger bites, you can consider Melewar, the 71.5%-owner of Mycron, and SSteel, the laggard & poorer performer.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.