KUALA LUMPUR: RHB Research has upgraded the steel sub-sector from Neutral to Overweight as the Improved fundamentals of steel stocks not fully reflected in recent share price run-up.

It said on May 18 that in view of better earnings visibility ahead, it was upgrading the steel sub-sector from Neutral to Overweight. Our top picks for the steel sub-sector are Ann Joo Resources (indicative fair value RM3.02), Kinsteel (RM1.25) and and Sino Hua-An (60 sen).

In a research note, it said the recent strong run-up in share prices had yet to fully reflect the fundamentals of steel stocks (in particular, the long steel sub-sector players such as Ann Joo Resources and Kinsteel) that will improve substantially in the near-term.

The factors were the four trillion renminbi stimulus plan by the Chinese government has started to kick in; concerns on dumping from Chinese long steel producers have eased; and rising crude oil prices will once again boost demand for long steel products in the Middle East.

RHB Research maintained its view that the recovery in both the demand and prices of flat steel products will lag the long steel products. It only expects a mild recovery in this segment if it does recover in the near-term at all.

It said the Chinese government recently raised export rebates for flat steel products; and the hefty duties slapped by the US Commerce Department on standard steel pipes imported to the US from China since June 2008 have prompted Chinese steel pipe producers to divert their products to the international market ex-US.

Despite the higher capacity utilisation in China’s steel sector will boost demand and prices of metallurgical coke, this does not necessarily enhance metallurgical coke producers’ profitability, given that metallurgical coke producers inherently have little bargaining power against its customers and suppliers.