ANALYSTS and local steel industry players feel that the outlook for the industry remains uncertain, with no visible signs of demand picking up.

Local steel makers are fretting over lower steel prices, mounting inventories and sluggish sales, no thanks to the weakening demand as a result of the spiral effect of the global financial crisis.

The latest move by the world’s largest buyers of iron ore, the Chinese steel makers, to push for a price reduction in their annual price talks with the three leading suppliers Cia Vale do Rio Doce, BHP Billiton Ltd and Rio Tinto Group, reflects the fact that demand for the commodity is slipping.

“Despite the softening input cost, we expect the sequential earnings momentum of domestic steel players to remain weak over the next two to three quarters,” AmResearch says in research note.

“A protracted down cycle in steel demand would inevitably erode the cash flow of working capital positions of steel companies.”

The research house points out that steel millers remain saddled with high inventory levels despite putting through massive write-downs over the last two quarters.

Steel inventories at Shanghai’s main port was reported to have jumped to a three-year high of 2.1 million tonnes in February from 1.3 million tonnes in December last year.

“Steel makers must be mindful of their inventories level,” says AmResearch.

As of December, most local companies had sizeable inventories because they had trouble clearing stocks in the face of declining demand.

According to AmResearch, this was caused by the muted steel demand, implementation lags in the Government’s pump-priming activities and a weak export market.

“Unless the Government quickly kicks off its projects under the Ninth Malaysia Plan, the long-term demand for steel remains uncertain,” says an analyst from the research house.

He adds that steel bar prices have not really rebounded since its fall from the peak, because local demand is still limited.

In contrast, OSK Research analyst Ng Sem Guan believes that the outlook for the steel industry looks positive, especially for long steel players.

Given that stimulus packages are being introduced across the globe, Ng expects steel players to benefit from the construction sector, which will benefit from many of the measures introduced in the packages.

“We expect the demand for steel to improve in the second half,” he says.

He adds that the local steel prices remain competitive and equivalent to international prices.

On the steel inventories, he says these came off a bit on a quarter-to-quarter basis from the third quarter to the fourth quarter last year, although some companies still possess “quite high inventories”.

However, he concedes that the international market is generally quiet now as countries worldwide are slowly slipping into recession.

Following China’s bid to push for a price cut in materials, OSK estimates a 30% cut would bring steel prices back to normal levels. The market is already expecting a 20% to 30% cut in iron ore prices, says Ng.

According to Bloomberg, both domestic and international steel makers have reached a consensus of a 40% to 50% cut in material prices amid the softening demand.

On the mini-Budget, Ng says, “It would certainly benefit all steel players, especially long steel players. There should be some applications for flat steel players too, but limited.”

Malaysian Iron and Steel Industry Federation (MISIF) president Chow Chong Long says the current domestic demand for steel is still weak, while exports continue to drop as a result of the downturn.

“Steel players are concerned with this situation as capacity utilisations of all steel mills have been less than 50% since the fourth quarter of 2008. This is sufficient to meet current low demand. We are not the only country facing this difficulty; other international steel players are also facing the same problem,” he adds.

According to Chow, in the last quarter (Oct - Dec 2008) alone, five major local steel players incurred losses to the tune of RM1.2bil. “If the market persists at this low level, the steel industry may see further losses in the upcoming quarter,” he warns.

Chow says the Government should give more support to the industry in order for it to pull through this difficult period.

So far, the first stimulus package has had a minimal impact on the industry, he adds.

“The impact of the second stimulus package announced recently depends largely on how fast the implementation takes place, and the amount for development expenditure over two years may not be so significant when translated into steel consumption,” he argues.

He says government assistance for the steel industry, which consumes a lot of energy, should also be in the form of lower energy costs, such as through a tariff reduction by Tenaga Nasional Bhd.

“The recent cut of 5% is grossly inadequate. From the formulation used for the previous 26% increase, the reduction this round should be in the region of 20%,” he adds.

Chow says other international steel players facing similar difficulties have begun to dump cheap steel in countries that are less protectionist, including Malaysia.

“We hope the Government would take appropriate actions to prevent cheap steel from being dumped in our country,” he says.