On Tuesday (25/11/2008), Perwaja Holdings Bhd and Choo Bee Metal Industries Bhd announced they had provisions of RM120.2mil and RM22.3mil respectively in the third quarter for impairment in the value of their inventories.
Other steel companies are likely to announce a similar provision when releasing their results.An analyst at a bank-backed brokerage said it would be inevitable for steel makers to make that kind of provision as global steel prices had fallen significantly.
The plunge, which started in July, was sparked by weakening demand for steel products during a global economic crisis. Reduced material costs also mean lower selling prices of steel products.
China, which produces a third of the world steel supplies, saw output declining by 17% in October. Steel prices in India have plunged by about one third since July and halved from the beginning of this year.
Aseambankers said data from WorldSteel showed a 12.4% year-on-year and 7% month-on-month fall in global steel production in October due to falling demand. China’s economic stimulus package, although positive, may face a lag before implementation.
Additionally, it was still uncertain if the pump-priming efforts would generate sufficient demand, especially in the first half of next year, it said.
The analyst said, while the inventory issue would impact profitability in the short term, the greater concern currently was demand.
The global credit crisis has resulted in tighter lending, and infrastructure projects, in particular, are bearing the brunt.
“Stockists are throwing stocks at bargain prices but even buyers with deep pockets will be careful in spending in the current environment,” he said, adding that some buyers were willing to pay a penalty for cancelling earlier orders rather than collecting stocks with a diminishing value.
He said the catalyst for price recovery was to spur demand via fiscal stimulus, of which a number of governments had already announced.
OSK Investment Bank, in a report, said Malaysia Steel Works (KL) Bhd (Masteel) was able to liquidate stocks easier than its peers because of its small size and ability to keep inventory cycle short.
“While Masteel did not provide for diminution in inventory value, some of the losses are already reflected in the lower EBITDA (earnings before interest, tax, depreciation and amortisation) margin of 9.9% against 17.1% in the preceding quarter,” it said.
