Steel: OVERWEIGHT

- Mandatory standards takes effect today

* Malaysia will implement the mandatory standards on iron and steel products from today onwards, The Star reported today. This forms part of the Malaysian Government's further liberalisation measures announced in June.

* Mandatory screening will be implemented on imported iron and steel items. It was earlier reported that Sirim Bhd would charge RM2,000 per 100 tonne of products screened although we understand that the testing fees have been reduced by 39%.

* We gather that enforcement will be based on the revised list of 187 tariff lines instead of 627 tariff lines. Under this new ruling, all importers of iron ore and steel products need a certificate of approval (COA) or a letter of exemption from Sirim for non-construction sectors. COAs for the construction sector are from the Construction Industry Development Board.

* The COA ruling was supposed to take effect on August 13. However, the Malaysian Government subsequently announced a temporary exemption for importers of non-critical iron ore and steel products (e.g. nuts, bolts and screws) until October 12. This followed some objections by construction players concerned with potential delays in the delivery of iron and steel products due to the mandatory screening process.

* Based on our channel checks, the 187 tariff lines mainly involves structural items for the construction sector. More importantly, we believe the introduction of the COA would have a mild positive impact on local long steel players as: (1) Such a move would help weed out sub-standard imported steel products; (2) Local steel products will have the upperhand over imported products in terms of logistics and time factor.

* We maintain our OVERWEIGHT call on the steel sector. Regional steel prices have held firm, as positive impact from pump-priming initiatives around the world are beginning to filter through. On the local front, cumulative quarterly losses of steel millers have narrowed substantially to RM99mil in 2Q09 against RM429mil in 1Q09 and RM682mil in 4Q08.

* We believe that recovery in domestic steel demand should gather momentum by end-2H 2009 ahead of pump-priming activities by the Malaysian Government. We expect up to RM62bil worth of big ticket projects likely to be rolled out over the next six to 12 months.

* Our discussions with various local steel millers reveal that domestic steel prices may reach RM3,000/tonne by 2010 due to a resurgence in local steel demand amid potential supply squeeze. Within the sector, Ann Joo Resources Bhd remains our top pick with an unchanged fair value of RM3.20/share.