Following the release of ECRL progressive news, the entire construction industry in Malaysia has undoubtedly been boosted up by the mega project.
With reference of graph above, Annjoo, as a material supplier to the industry, is performing bullishly ever since the beginning of year 2019.
Recently, steel industries are not making good business, though.
This is due to most players are facing oversupply issues and therefore incurred of massive losses.
Retrace to year 2015, where local steel companies had a tough time when steel products from China spread and eventually flooded the local market.
In their financial reports we could find that the industry was stacking up their inventories during that period due to noncompetitive pricing.
In year 2016 and 2017, local steel companies experienced a temporary reprieve.
It was reported that, strong earnings arose mainly from higher steel prices.
Thank to China government's policy of withdrawing 100 to 150 million tons of crude steel making capacity over a period of five years to battle excess capacity problem in China.
Annjoo was especially outperformed over other local steel players.
The Group has successfully brought in hybrid blast furnace electric arc furnace which helped the Group to improve its cost structure vastly.
Upon investment in this new technology, Annjoo was easily became the lowest costs' steel producer across the region.
The reprieve ended after the government switched over in year 2018.
Local market demand has soften, due to weak market sentiment.
It has been reported that inventories started to pilling up again among local steel players.
Whilst, the Pakatan Harapan government on hold several large infrastructure projects, this were akin to pouring fuel on a fire over local steel companies.
The competition among locals became more severe when China-backed Alliance Steel (M) Sdn Bhd set up the country's largest steel mill in Gebeng, Kuantan with an annual production capacity of 3.5 million tonnes of long steel products.
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The local steel industry is centered on two major types of products — long and flat.
Long products — including billets, bars, beams, iron bar, rebars and wire rods are used in the construction and civil engineering industries.
The major local producers of long products are Masteel, Ann Joo Resources Bhd, Southern Steel Bhd and Alliance Steel.
Flat products such as steel slabs, hot rolled coil (HRC) and CRC are mainly used as raw materials for downstream applications in the automotive, oil and gas, machinery and equipment as well as other manufacturing sectors.
To put things into perspective, there are only two major steel players operating blast furnaces currently — Alliance Steel and Eastern Steel.
Annjoo is adopting the hybrid blast furnace and BF-EAF (blast furnace-electric arc furnace) technology and Masteel is also scaling up its operations in line with the installation of a new technological package.
In general, a blast furnace is three times more capital-intensive than an electric arc furnace (EAF) but its steel-making cost composition including raw materials is about 25% lower than the latter’s.
A quick check on steel industry portal www.steelonthenet.com shows that the conversion cost for basic oxygen furnace steelmaking was US$327.56 per tonne in 2018, lower than EAF’s US$430.60 per tonne.
In a nutshell, a blast furnace will have a better competitive edge than an EAF in the long run.
Note that an EAF uses 100% steel scrap as a source, whereas a blast furnace uses 95% iron ore and 5% steel scrap.
Scrap metal and iron ore are commodities and their prices tend to fluctuate, depending on supply and demand as well as international trade policies.
Interestingly, scrap prices diverged from iron prices last year as the Chinese environmental clean-up gained momentum and Chinese mills were encouraged to use more scrap than iron ore.
Also, the 25% tariff on steel imports into the US — one of the largest exporters of scrap has buoyed scrap prices internationally.
US mills are able to pay higher prices for scrap due to high domestic steel prices.
EAF offers more flexibility when there is a need to reduce output sporadically. “A blast furnace has bigger capabilities but is less capable of shutting down in times of soft demand, resulting in huge inventory holding costs."
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Source: https://www.theedgemarkets.com/article/cover-story-better-times-ahead-steel-sector
Based on the latest quarter report from Annjoo Q4 FY2018, the PBT has became thinner due to the decline in selling price and inventories written down, mainly attributed to the oversupply situation domestically.The local steel industry is centered on two major types of products — long and flat.
Long products — including billets, bars, beams, iron bar, rebars and wire rods are used in the construction and civil engineering industries.
The major local producers of long products are Masteel, Ann Joo Resources Bhd, Southern Steel Bhd and Alliance Steel.
Flat products such as steel slabs, hot rolled coil (HRC) and CRC are mainly used as raw materials for downstream applications in the automotive, oil and gas, machinery and equipment as well as other manufacturing sectors.
To put things into perspective, there are only two major steel players operating blast furnaces currently — Alliance Steel and Eastern Steel.
Annjoo is adopting the hybrid blast furnace and BF-EAF (blast furnace-electric arc furnace) technology and Masteel is also scaling up its operations in line with the installation of a new technological package.
In general, a blast furnace is three times more capital-intensive than an electric arc furnace (EAF) but its steel-making cost composition including raw materials is about 25% lower than the latter’s.
A quick check on steel industry portal www.steelonthenet.com shows that the conversion cost for basic oxygen furnace steelmaking was US$327.56 per tonne in 2018, lower than EAF’s US$430.60 per tonne.
In a nutshell, a blast furnace will have a better competitive edge than an EAF in the long run.
Note that an EAF uses 100% steel scrap as a source, whereas a blast furnace uses 95% iron ore and 5% steel scrap.
Scrap metal and iron ore are commodities and their prices tend to fluctuate, depending on supply and demand as well as international trade policies.
Interestingly, scrap prices diverged from iron prices last year as the Chinese environmental clean-up gained momentum and Chinese mills were encouraged to use more scrap than iron ore.
Also, the 25% tariff on steel imports into the US — one of the largest exporters of scrap has buoyed scrap prices internationally.
US mills are able to pay higher prices for scrap due to high domestic steel prices.
EAF offers more flexibility when there is a need to reduce output sporadically. “A blast furnace has bigger capabilities but is less capable of shutting down in times of soft demand, resulting in huge inventory holding costs."
"
Source: https://www.theedgemarkets.com/article/cover-story-better-times-ahead-steel-sector
Excluding the recognition of compensation recorded in this quarter, Annjoo is actually making loss.
Management has yet to come out solutions to counter the price war with Alliance steel.
Therefore, I believe the current price movement will be just a short term rally.
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