Thursday, June 24, 2010

OSK Research Neutral on steel sector

KUALA LUMPUR: OSK Research maintains its Neutral recommendation on the steel sector after China's Ministry of Finance said the export tax rebates on more than 50 flat and long steel items will be removed effective 15 July 2010.

Among the items are hot rolled sheet and strip, pickled coils, HR, CR and coated narrow strip, plates, H-beams, angles and channels.

OSK Research said at first glance, the removal of export tax rebates will be positive to steel mills ex-China. In 2008, when the Chinese Government removed its export rebate on billets, exports of these products from China plunged almost immediately to nearly zero during the year.

'Our back-of-envelope calculation shows that the 9% rebate currently applied to commodity grade Hot Rolled Coils (HRC) is equivalent to about US$50 to US$60/tonne at prevailing offer prices,' it said.

The research house said however, as the government still retained its incentives on alloy Hot Rolled sheet or strip and alloy plate, Chinese mills may begin to raise the percentage of boron-added HRC and plate in their production mix over carbon steel to benefit from the remaining rebates on alloy steel.

'Therefore, the move may not bring about a significant reduction in export by Chinese steel mills unless the blanket removal is adopted. Besides, local flat products continue to enjoy protection in the form of a 25% import tax,' it said.

OSK Research said the latest development may not give rise to any change in the fundamentals of steel mills ex-China, and it reiterates its NEUTRAL stance on the Malaysian steel sector.

'We continue to remain cautious on the potential weakening financial performance for 2H as a gradual increase in steel prices coupled with selling pressure due to weak sentiment are likely to erode margin.

'Also, the 3Q benchmark prices for iron ore and coking coal are also looking to again increase by double digit percentage despite the weak spot market, which may cause further confusion among end users, which may in turn prompt them to hold back on procurement. That said, we are mostly neutral on the steel counters under our universe,' it said.

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