Steely as it goes

According to UOB KayHian, China may accept the 85% price hike for iron ore(includes a freight premium) from BHP Billiton and Rio Tonto for a 1 year contract. To recap, earlier this year, Asian steel mills and the Brazil-based CVRD agreed on a 65% increase in iron ore price for 2008. This topic was discussed earlier here. The acceptance was widely expected as China seems not to have enough of raw materials(ie iron ore/scrap metals) for its production of crude steel while the demand is ever increasing. As the biggest steel producer in the world with limited reserves, China imported over 383m tonnes of iron ore and concentrate in 2007. Most of the steel mills in China rely at least partially on overseas supply of iron. Steel mills face great pressure from rising raw material costs and but it is likely to pass the cost to the consumers at a much higher percentage of increase. The latest acceptance by China to buy at a higher iron ore price in addition to operating costs (i.e. thermal coal, coke, power tariff, etc.) will increase the millers' cost of production. Unless China's demand for steel reduces due to the slow down of its economy, steel prices would definitely on the rise again. The supply constraint and hugh demand within China and escallating raw material cost forced the Chinese Government to impose export duties on its semi-finished and finished goods (billets, bars, wire rods and pipes) in addition to its removal of the rebate on VAT for these products. China in curbing export and the growing need for steel products by other developing countries augurs well for the steel sector outside China. The strong prospect of steel sector is underpinned by rising international steel and steel product prices and strong steel demand locally and overseas egs Singapore's Intergrated Resorts, India and Middle East Countries. Amongst the steel companies in Malaysia, I would consider Ann Joo Resources Bhd and Kinsteel Bhd(with the spinoff from the listing of Perwaja this year) as the most complete intergrated player which have presence in the upstream, midstream and downstream segments. With efficient and larger production infrastructure already in place, they are ready to ride on this commodity boom. Ann Joo especially has a strong management team that has so far provided an excellent track record in effective inventory management and procurement strategies. Ann Joo has a P/E of 7X FY09 -eps 09 of 50sen while Kinsteel has a P/E of 7X FY09-eps 09 of 19 sen. The expected valuation of these companies may have to be revised again soon with the coming up of good quarter results. As noted, Ann Joo's latest 1Q09 y-o-y growth in net profit was 600% with a revenue of RM838m and net profit of RM96.3m.

* More than 60,000 people are believed to be dead or missing in a devastating cyclone that hit Myanmar on May 2. Interestingly in a study done on insurance claims by Swiss Re, last year itself, there were 149 natural and man made disasters(13,800 people dead/missing) in Asia with an insurance payout for property and business for USD3.5b. On the contrary, in Europe during the summer storm(1,088 people dead/missing) the insurance payout was USD12.43b. Are Asia's businesses and properties under insured? Pretty much so.