Karachi, October 11, 2021 (PPI-OT): Pakistan Steel – Metal prices dip as the energy crunch intensifies

International scrap/copper prices have decreased by 3.5%/1%MoM in Sep’21 to currently hover around US$483/9289/ton compared to last 3 months avg. of US$493/9407/ton as global demand relaxes with economic activity halting on the back of enormous shortage of electricity in world’s leading manufacturing nations amid floods, other weather disruptions and Evergrande fallout.

Furthermore, partial closure of steel and metal manufacturing facilities are on the cards with looming power/energy shortage (in EU and China) could force countries to shut down or cut production of energy intensive industries. We have incorporated average scrap prices of US$435/375/ton for FY22/23 against US$360/ton average for FY21 and copper prices of US$9000/8700/ton for FY22/23 against US$7500/ton average for FY21.

Local rebar prices have remained flat in the month of Sep’21 to stand at 179-180K/tons, following 14%MoM increase in Aug’21.

In light of economic uncertainty and geopolitical tension, the Steel sector has underperformed (CYTD: -6.1%, FYTD: -11.9%) compared to KSE-100 benchmark (CYTD: +1.6%, FYTD: -6.1%), however, we expect earnings to remain robust in the near term.

Our preferred play is ASTL (TP: PkR64/sh, 70% upside) and MUGHAL (TP: PkR179/sh, 83% upside) with stocks currently trading at FY22 P/E of 6.24x/4.38x while on PEG basis, ASTL and MUGHAL is trading at 0.33x/0.16x.