AKD Securities Limited Equity Research - Daily Report.

Karachi -- September 23, 2022 (PPI-OT)

Scrap prices declined but rebar prices are likely to hold ground

International scrap prices have declined 8%MoM in Sep'22 and are currently hover around US$360/ton compared to FYTD/CYTD avg. of US$383/480/ton. However, the decline in scrap prices has been largely offset by rising energy costs for Electric Arc Furnace producers across the globe.

Furthermore, the European energy crisis is unlikely to resolve anytime soon, as energy prices are unlikely to see any mean reversion, and scrap prices still maintain long-term averages. Hence, the mills across Europe are likely to keep rebar prices high to sustain the rebar-scrap margin which is currently trading at US$260-270/ton.

Local rebar prices have remained flat at PkR227-229K/ton in Sep'22. Henceforth, current rebar prices incorporate scrap prices of US$470-480/ton at PkR/US$240, as per our calculation, if margins are at FY22 levels. Moreover, even with lower scrap prices, we expect rebar prices to hold ground at least in short term, due to continuous depreciation of PkR against US$ and rising fuel and finance cost.

Furthermore, we believe, local players are still shielded from dumping of imported rebar as the landed price of is also expected to remain high and currently estimated at PkR245K-255K/ton, still at a premium of 10-12%.

Local long steel manufacturers have underperformed, declining by ~4.8% against 4.3% of KSE-100, as the broader market took the pressure of constant currency depreciation. However, in the case of MUGHAL (TP: PkR87/sh, upside 37%), the risk profile is somewhat reduced due to its diversified product portfolio and dollar-denominated income from the non-ferrous segment where currency depreciation is likely to further bolster non-ferrous contribution to the bottom line.

International scrap prices declined 8%MoM in Sep'22:

International scrap prices have declined 8%MoM in Sep'22 and currently hover around US$360/ton compared to FYTD/CYTD avg. of US$383/480/ton. Scrap prices continue to remain in backwardation due to a slower demand outlook from the EU and China.

For Eurozone, industrial production struggles are largely driven by a slowdown in economic activity due to soaring energy prices (a sharp increase of 50% in gas prices) and rising interest rates (1.25% increase in the key rate since Jul'22).

Over to China, multiple Covid-19 lockdowns and a slowdown in construction activities have played their part in hampering steel...