3Q profit likely to exceed estimates. We had expected CSC Steel to make a strong comeback in the upcoming 3Q results and were bullish in our forecasts (refer to Figure 1),but we suspect its actual performance may surpass our numbers. The escalating steel prices, particularly flat products, from April 2009 up to recently (refer to Figure 2) fanned our optimism on its immediate quarterly financial performance. As usual, the lag impact of lower average selling prices of the main raw material, Hot Rolled Coil (HRC), compared to the rising selling price of its finished goods, including Cold Rolled Coil (CRC), Galvanized Iron (GI) and Pre-Painted GI (PPGI), may give rise to a mismatch of higher revenue and lower production costs, thus widening the profit.
4Q numbers to hinge on China steel price recovery. While we are excited over the firmer price trend of the flat steel products (domestic), the sharp pullback in China’s local steel prices since August 2009 had to certain extent shaken market sentiment. Although the official HRC price for November 2009 delivery by Megasteel SB remains flattish m-o-m at RM2,650 per tonne, our market sources suggest that larger discounts are being offered by suppliers. Meanwhile, while December prices remain unknown, we believe this will depend on the pace of recovery in steel prices in China. We have witnessed a rebound in China since last Friday but are uncertain over its sustainability. Hence we are conservatively projecting a q-o-q profit contraction entering into 4Q. Impact from liberalization still sketchy.
CSC Steel also may see a bigger market now that local buyers of secondary flat steel products, which had previously enjoyed a 40% duty exemption on their CRC requirements, may prefer to buy from local producers as imported CRC was taxed at 25% from Aug 1, ‘09. The higher volume also means improved efficiency and thus, cost saving for the company. Nonetheless, as we suspect that Megasteel would be a major beneficiary considering that CSC Steel may need to source most of its HRC requirements locally although it is still negotiating with the Government. In the interim, we are not particularly concerned about the risk of an influx of imported steel after the implementation of the Asean Free Trade Agreement (AFTA) in 2010 as we believe the Government may introduce other forms of non-tariff barriers to protect local producers.