The government has liberalised the domestic steel market by removing price and import restrictions. Why now? Well, there has been severe steel price inflation over the last 2 years. However, the liberalisation is not new, its policy catching up with reality. Many steel producers have been skirting the cap by lumping additional charges, handling charges and other non-regulated charges in order to maintain the global price reality.
Government construction projects have been slowed enormously due to the inability of contractors to source for steel at the official price cap. Escalation in building materials were not allowed to be passed through since there was an official cap. Liberalising when the market is strong is OK, but what about when market is weak, I hope none of the bloody steel producers would shout for protection then, OK! You cannot have it both ways, when its good, give me market price, when its bad, please ask government to stop the foreign big boys to dump their steel in Malaysia, boo-hoo... you want to grow up, then play like an adult.
The cap removal does NOT allow steel makers to charge supernormal profits. The liberalisation was due to the enormous bull run in the raw materials for steel. Just check out the price of coke and scrap metal over the last 2 years. For example, the latest international price for steel billets was US$980/mt (or RM3,140), and you will find that we have a ridiculous cap at RM1,918/mt.
These kind of caps are not just in steel but also in many building materials. Once and for all, we cannot and should not "protect" the local building materials producers - why the need to do so. We are not in a war zone. We do not have a lot of enemies who would not sell us these products. We are not terribly great at the efficiency of producing these items. Why stay in a product when we have no strong competitive advantage. If someone else can produce cheaper in Thailand or China, even after adding the transportation cost... what economic right do we have to justify producing these things ourselves?
Same argument for Proton, you all might like to note. There are certain sectors and industries we DON'T NEED TO HAVE if someone else is better at producing them.
Back to the steel thing, while the liberalisation is very good. Its just catch-up policy making. Yes, some local steel makers will be able to make a bit more, but its not a lot more. The removal of the caps now also exposes them to the downswing. If the local players are not efficient enough, in a down turn contractors will buy from China or Thailand or Korea even.
Local players have to be able to compete at international prices now, hence those that can MUST HAVE:
a) Capacity & Size
b) Diversity of products
While many are buying the smaller players, they are not the way to go moving forward. You need pricing strength and better cost averaging on all expenses, hence the bigger you are, the better to go through the cyclical industry they are in. I do think steel is in for a dramatic upswing stage with the demand from China and Brazil alone, and the rally will have at least another 2 years to go. My best picks would be in order of preference:
1) Kinsteel (market cap RM1.3bn)
2) Lion Industries (market cap RM1.7bn)
3) AJR (market cap RM1.8bn)
I would generally quickly trade in and out of the OK smaller players for the reasons cited above, e.g. Leader Steel (RM100m), Masteel (market cap RM230m).
p/s photo: Maggie Cheung Hor Yee
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