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HG Metal hopes to ride on oil price spike

Vince Chong - October 10, 2004
The Business Times

CITING the increasing difficulty of predicting uptrend cycles, mainboard-listed steel trader HG Metal Manufacturing says it is hoping to ride on the oil price spike as smaller traders struggle to stay afloat.

CEO Wee Piew told BT yesterday that while steel-sector cycles used to come round every 5-6 years, greater price transparencies and increased market information in mass media like the Internet have resulted in faster business reactions. Which makes trend forecasting a difficult task.

'Steel companies with the financial clout will be able to profit more from the high oil and raw material prices as smaller ones may not be able to survive if they make just one mistake, for example, and buy at the wrong time,' he said.

'We want to believe we are one of those who are financially strong enough to get the most out of the current situation.'

One way bigger steel trading companies can benefit from the current oil price rise is their ability to compete for stock while their smaller counterparts are priced out of the market.

'If the price increase is, say, 5 per cent, companies like us will sell it to customers for more than that, so, price hikes in oil are an extra boost,' Mr Wee added. HG Metal's interim net profit for the period ended April 30 quadrupled to $5.3 million from $1.3 million in the same period last year due partly to rising steel prices.

Freight costs have risen to US$50 per metric tonne (pmt) as a result of higher oil prices, he said, from US$30 pmt at the beginning of the year. This has partly led HG Metal to getting supplies from China, which is nearer than its usual destination of Ukraine. Prices of steel in China have also stabilised since the government installed measures in May to cool potential over-investment.

Steel plates now cost about US$600 per tonne in Asia, and global shortage means that it will continue to rise this quarter. This is partly caused by the temporary shutting down of some global mills as they revamp and upgrade their facilities to cater to future demand.

Half of HG Metal's mainly South-east Asian business comes from supplying steel plates for shipbuilding with the other 50 per cent comprising sales of products like bars and roofing material. Mr Wee hopes to take this to the next level of producing higher-value-type products such as thin sheets for car manufacturing, for example. This could include buying a smallish mill in China, though nothing has been planned yet.

But despite rising steel prices, Mr Wee does not believe the sector is overheating. 'Fundamentals are there, with the US economy continuing to be strong, with steel plates there costing more than US$700 per tonne, while prices in Ukraine and Russia are rising because their domestic demand is increasing,' he said.