Thursday, January 6, 2011

OSK Research Neutral on Malaysia steel sector

KUALA LUMPUR: OSK Research is maintaining its Neutral rating on Malaysia's steel sector while it is Overweight on China's steel sector.

It said on Thursday, Jan 5 floods in Queensland, Australia have brought the shipments of coking coal to a virtual standstill and major producers have declared force majeure.

South Korea and Japan steel mills, being the major customers of Australia's coal, may be marginally impacted by the supply shortage as sluggish steel demand in the past few months may suggest sufficient inventories at their yards.

OSK Research said supply is likely to return to normal level from February onwards.

China's steel industry, which is currently self reliant on coking coal supply, is not directly affected by this adverse event, which has in fact partly contributed to the higher selling prices of raw material and steel products.

OSK Research said it was reiterating its OVERWEIGHT stance on China's steel sector on the belief that the Chinese government will continue to spend on FAIs in order to keep GDP growth at 8%, while flat producers may benefit from consumption upgrading.

'Nonetheless, we expect steel and coal prices to ease in the next few weeks as the current price spiral is driven by a temporary supply shortage that is unsustainable, and thus may not benefit Malaysian steel mills that generally hold bigger stockpiles.

'Malaysia's steel mills also do not consume coking coal as they operate mainly EAFs. All said, we maintain our NEUTRAL rating on Malaysia's steel sector,' it said.

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